If you could wager money on the winner of the NCAA tournament at the very beginning of the bracketed tournament, what would be the best strategy? If you could pick ten teams as possible winners would you have a better chance of winning by picking the bottom 10 seeds #55 through #64 or the top ten, #1 to #10 seeds? Do you want to be the clever person who picks an under dog? What strategy puts the odds in your favor? Picking the best or picking the worst? Just like in college basketball teams have an advantage with funds dedicated to the athletic program, history, legacy, better coaching and better recruiting prospects, stocks are the same way. Some stocks just have advantages through institutional support, growth projections, earnings expectations, better management, better products, more innovation, and are able to recruit world class employees.
Think of the stock market as a huge bracketed tournament. What stocks would get the top 64 spots? For me it is the IBD 5o and the top 10 stocks in the S&P 500 for earnings and sales growth, along with some special plays. Which of these stocks would advance in your tournament compered side by side? Which have the best charts with defined up trends? Which stocks are truly special with innovative products taking over industries? Which crush their competition the easiest? What stocks would be in your sweet sixteen? Final four? Do you have a champion? Limit your trading to only the very best stocks and buy them at the right times. Always look for the champion. Which stock could win it all? Pick that one.
It may be fun to root for an underdog in sports but it is painful to trade an underdog in the stock market.