Wall Street might shrug off the likes of Amara Shaikh, Sharon Hoang and Janet Liu simply because they're giggly 11-year-olds with braces and backpacks. But if you want to make some serious money in the stock market, you'd be wise to take some pointers from these fifth-graders from Tom Matsumoto Elementary School in San Jose, Calif.
In a matter of 10 tumultuous weeks earlier this year, they earned double-digit returns on their stock portfolios -- about 10 times more than the average index fund.
The kids were participating in the Stock Market Game, a national education effort that allows youngsters to invest a hypothetical $100,000 portfolio like a grown-up -- selecting real stocks to buy and sell, paying trading fees and enjoying (or suffering) the consequences of their decisions. Forty-four kids at Matsumoto Elementary broke into 13 stock-picking teams and did so well that they won all 10 of the top awards in the San Francisco Bay Area.
We talked to six of these winners -- and the Midwestern winner of the Stock Market Game's essay contest -- to see whether their strategies could help all of us be better investors. Here are five lessons learned from the kids.
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1. Buy what you know
Every time 10-year-old Ashley Wong sits down to write a report, she starts by searching Google (GOOG, news, msgs). When Courtney Nguyen, 10, is in the mall -- and that's often -- she notices that the Apple (AAPL, news, msgs) store is always packed. Ask 10-year-old Katie Thi and her friends where they got their cell phones, and four of six chorus "Verizon." (The two others don't have cell phones.)Not surprisingly, all of these companies ended up in these girls' portfolios.
Sharon Hoang, Courtney Nguyen, Janet Liu
"They're all stocks that we use in our everyday lives," Amara said.
Ashley Wong, Amara Shaikh, Katie Thi
That's what led him to buy shares in such companies as Toys R Us and 7-Eleven -- both of which have since been bought out -- as well as shares in Limited Brands (LTD, news, msgs), which now owns Victoria's Secret and Bath and Body Works, when they were relatively young and untested.
Being an avid consumer and staying aware of how companies serve their customers is how you know whether a company's products have hit a nerve or are quickly becoming obsolete, Lynch wrote.
2. Do your homework
Janet was trolling the Internet for stock ideas when she ran across a recommendation for Goldman Sachs Group (GS, news, msgs). She started pulling up articles, its stock history and information about the company's finances. The more she learned, the more she liked it. She talked two teammates into buying shares in the investment banking company because her research indicated it had been hit unjustly hard by troubles in its industry and was due for a rebound. She was right. During the next few weeks, Goldman's shares soared about 38%.Cameron Fisher, an 11-year-old from Kansas City, Mo., found Cracker Barrel Old Country Store (CBRL, news, msgs), a restaurant operator, in much the same way. Looking at five years' worth of stock price history, Fisher figured that this healthy and profitable company was due for a pop. Its gains helped fuel his team's 9% return over 10 weeks.
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Tips from a whiz-kid investorDamon Williams, 15, explains how to turn $1,000 into more than $500,000 by investing in the stock market.
Picking stocks for profit isn't all about the consumer experience, though. Some of it is about the numbers. In addition to knowing what a company does, you need to investigate the company's finances and make sure you're comfortable with its trading price.
Generally speaking, a company would be a wise buy when its market price compared with its earnings -- that's called a P/E ratio in Wall Street-speak -- is below its historical average or below its percentage earnings growth. How do you know the historical average? You can find a company's average in Value Line investment reports, which are published on the Web and in books you can find in the library. (You can figure a company's current P/E by dividing its stock price by its earnings. In other words, if it sells for $20 a share and has $2.50 per share in annual earnings, its P/E is 8.)
What if the current P/E is high based on its history but you still think the company's a good buy? See how the P/E compares with the company's earnings growth. If the company's profits are growing 20% a year, a P/E of 20 could be reasonable. But experts contend that a higher P/E suggests that the company's stock is overpriced.
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