Project Number: DZT 0905 STOCK MARKET SIMULATION An Interactive Qualifying Project Report: Submitted to the Faculty of WORCESTER POLYTECHNIC INSTITUTE in partial fulfillment of the requirements for the Degree of Bachelor of Science By Brandon Rubadou _____________________________ Carl Anderson _____________________________ Daniel Metcalf _____________________________ Jacob Loitherstein _____________________________ Richard Wingert _____________________________ William Callaway _____________________________ Approved by Professor Dalin Tang, Project Advisor ___________________________________________ i Abstract Through the use of tools and resources available from the internet as well as text and media references, a team of six people conducted an eleven-week stock-market simulation to investigate the validity and success of different trading strategies in the stock market. In the project group members selected companies to follow and trade based on how the company projected earnings. This required extensive research into the companies’ history and recent movements. The group found that all of the methods tested were adequate in producing returns but one method that followed Livermore’s Principals of investing was far superior to all of the others. The experience gained throughout this project will allow the group to become more competent investors in the future. ii Table of Contents ABSTRACT .................................................................................................................................II TABLE OF CONTENTS ........................................................................................................... III LIST OF TABLES……………………………………………………………..……………...VII TABLE OF FIGURES ................................................................................................................ IX 1. INTRODUCTION(DANIEL METCALF) ............................................................................. 1 1.1 GOALS ......................................................................................................................... 1 1.2 METHODS ..................................................................................................................... 1 1.3 OVERVIEW OF THE STOCK MARKET ............................................................................... 3 2. INVESTMENT DEFINITIONS (JAKE LOITHERSTEIN) ................................................ 4 2.1 STOCK .......................................................................................................................... 4 2.2 BOND ........................................................................................................................... 5 2.3 CD ............................................................................................................................... 5 2.4 IRA .............................................................................................................................. 6 2.5 MUTUAL FUND ............................................................................................................. 8 2.6 SECURITIES ................................................................................................................... 9 2.7 RISK TOLERANCE .......................................................................................................... 9 2.8 CAPITAL ASSET PRICING MODEL - CAPM ................................................................... 10 2.9 ROLL'S CRITIQUE ........................................................................................................ 11 2.10 DIVERSIFICATION ...................................................................................................... 11 2.11VOLATILITY ................................................................................................................ 12 iii 2.12 PORTFOLIO ............................................................................................................... 12 2.13 RISK AVERSE ............................................................................................................. 12 2.14 TREYNOR RATIO ........................................................................................................ 13 3. INVESTMENT STRATEGIES (BRANDON RUBADOU) ................................................ 14 3.1 Day Trading .............................................................................................................. 14 3.2 Value Investing ......................................................................................................... 15 3.3 Intrinsic Value .......................................................................................................... 18 3.4 Resources for Investors ............................................................................................ 19 3.5 100% Equities Strategy ............................................................................................ 20 3.6 Capital Growth Strategy ........................................................................................... 20 3.7 Countertrend Strategy .............................................................................................. 20 3.8 Double Top ............................................................................................................... 21 3.9 Double Bottom .......................................................................................................... 21 3.10 Memory of Price Strategy ....................................................................................... 22 4. Livermore’s Principles of Investing in Conjunction with the Top-Down Method (BRANDON RUBADOU)….………………………………………………………….………23 4.1 USING LIVERMORE'S PRINCIPLES AND THE TOP-DOWN METHOD ................................. 23 4.2 COMPANIES ................................................................................................................ 24 4.3 INITIAL INVESTMENTS .................................................................................................. 49 4.4 SIMULATION ............................................................................................................... 50 4.5 CONCLUSION .............................................................................................................. 61 5. THE COUNTERTREND STRATEGY (CARL ANDERSON)…..………………………63 5.1 USING THE COUNTERTREND STRATEGY ....................................................................... 63 iv 5.2 COMPANIES ................................................................................................................ 63 5.3 INITIAL INVESTMENTS .................................................................................................. 80 5.4 SIMULATION ............................................................................................................... 80 5.5 CONCLUSION .............................................................................................................. 90 6. THE INTIUITION STRATEGY (DANIEL METCALF)……………………..…………94 6.1 USING THE INTUITION STRATEGY ................................................................................. 94 6.2 COMPANIES ................................................................................................................ 94 6.3 INITIAL INVESTMENTS ................................................................................................ 114 6.4 SIMULATION ............................................................................................................. 115 6.5 CONCLUSION ........................................................................................................... 132 7. THE MEMORY OF PRICE STRATEGY (JAKE LOITHERSTEIN)…….………...…135 7.1 USING THE MEMORY OF PRICE STRATEGY ................................................................. 135 7.2 COMPANIES .............................................................................................................. 135 7.3 INITIAL INVESTMENTS ................................................................................................ 143 7.4 SIMULATION ............................................................................................................. 144 7.5 CONCLUSION ............................................................................................................ 155 8. CAPITAL GROWTH BASED INVESTING (RICHARD WINGERT)……….………156 8.1 USING THE CAPITAL GROWTH STRATEGY .................................................................. 156 8.2 COMPANIES .............................................................................................................. 157 8.3 INITIAL INVESTMENTS ................................................................................................ 203 8.4 SIMULATION ............................................................................................................. 204 8.5 CONCLUSION ............................................................................................................ 231 v 9. INTUITION BASED INVESTING (WILLIAM CALLAWAY)……….........................233 9.1 USING THE INTUITION RAPID BUY/SELL INVESTMENT STRATEGY ................................. 233 9.2 COMPANIES .............................................................................................................. 234 9.3INITIAL INVESTMENTS ................................................................................................. 244 9.4 SIMULATIONS ...........................................................................................................