Hedge Fund Trading Lesson: 4 Tips On How To Find The Next Apple

If you are like most retail investors, then you are probably looking for the hidden gem start-up companies like Apple AAPL. 

Today's installment from the series, 'Trading Lessons From A Hedge Fund Trader' will focus on Apple (NASDAQ:AAPL) as per our reader's request for research, available here on BehindWallStreet.com. 

The hunt for the next big investment sounds very alluring but the probability of finding that 'special' company is like winning the lottery.

We all know that the odds of winning the lottery are very small but yet we all buy lotto tickets occasionally. If you are among the select few  who are smart enough to completely avoid the lottery, my hat is off to you.

Did you know that predicting the next Apple AAPL is impossible. Most people tell you that they have the inside scoop on how to find these companies because it's an easy way to sell you on an idea.

                                                                                                                                                  Why is it impossible to find the next big ticket?

For something, anything to become immensely popular requires that the vast majority of the population to 'like' and 'desire' your product. Predicting the ever changing whims of consumer wants is impossible and knowing which companies will innovate and dominate a new product segment is equally impossible to predict.

So don't try to predict the future.  

Simply do as Peyton Manning does (the smartest NFL QB of all time and I wrote this trading article about his game), he takes what the defense will give him. He simply analyzes the current defensive scheme you are showing him and he will run a play that will most likely succeed against your planned defense.

He's not trying to predict his next move, he is just reacting to what the situation requires.

That's how the best QB in football history plays the game. Sports and trading/investing have many similarities and it is beneficial to take lessons from other sports, hobbies and interest and apply them to the world of high finance. 

Besides, learning about your passions is usually more fun than learning about trading and investing. And we all know that we are better at learning something when we are engaged and entertained.

So how do the pros approach investing? 

Did you know that most institutional investors are more concerned with how much money you lost versus how much money you can make. Most institutional investors would rather invest in a money manager who makes 1% per month with steady returns (minimal volatility with small draw downs) versus a money manager who can make them 2% per month but with huge swings (very high volatility with huge draw downs) in the portfolio.

In simple terms, institutions prefer the team who generated 12% per year while risking 10% than a team that generates 24% per year while risking 50% in order to generate those returns.

So what can we learn from the professional money managers?

1. Focus on ways to generate steady returns while limiting risk.

2. Don't look for big returns when you have to risk a lot to achieve those returns.

3. Stop looking for hidden gems because the odds of you finding them are very small. Most small companies usually fail so you're chasing high gains with high risk.

4. Stop buying lotto tickets.

Always remember that there are no free lunches on Wall Street. There is risk involved in every financial transaction.

For information regarding stocks we do like, check out our Flagship and ETF Newsletter.

This is a cursory look at Apple AAPL and I’m not making any specific buy or sell recommendation but merely voicing my opinion of the current situation. Each individual investor must conduct their own due diligence of each company, the market sector as well as their own financial situation and risk parameters.

 By Joel Laceda -October 2, 2013 BehindWallStreet.com