Stocks in 2011: Predictions Vs. "Mental Bets"

Whenever I see a title like "Best Stocks for 2011" I must check it out. I never act on predictions or take what is being said at face value, but I click anyway. In fact, half of the time I click with an attitude: "Yeah, yeah, let's see what you have to say..." Even if there are 100 stocks on a list, I feel compelled to check them all (I guess I am a list junkie).

Most predictions go unverified - that's how predictors get away with them year after year. When was the last time you checked a "Best Stocks for 2010," or "2009," list to see how the picks panned out? We don't care: that was then, we care about now. We just might find something useful...

As a stock trader, I know how dangerous it can be to act on predictions. Even the most accurate or compelling ones often turn out wrong because they are based only on known facts - and who knows what the future holds? Nobody can predict the unknown, not in stock trading anyway. But what we can do, especially as stock traders, is to be prepared for as many eventualities as possible. I call that "mental bets."

If a prediction sounds plausible, I ask myself: What will happen if it does come true? What will I do? I try to develop a range of scenarios that ultimately translate into buy, sell or hold decisions. If "A" happens, I will do "B"; if "C" happens, I will do "D," and so forth. If "A" does not happen, I don't do anything.

But what I don't do is act in anticipation, no matter how convincing a prediction. I wait for the market to validate it before acting. This way I can also engage in predictions of my own: if something happens as I expect, I stand prepared to act; if it does not happen, or if it changes its course, I don't lose any sleep over a "wrong" prediction - it was just a mental bet, no sweat, I am on to the next one.

It's a great mental exercise to see if what you think will happen actually happens, how accurate you are. (By the way, it's much worse if your mental bet pans out but you fail to act through lack of conviction.)

So, what are the best stocks for 2011? I have no idea. But I do know this: there will be winners and there will be losers; I will try to buy as many winners as I can because I know I can catch them as soon as they emerge.

More from this contributor:

A Christmas Guide to Stock Picking

Financial Planning: Smart and Not-So-Smart year-End Moves

Stock Trader's New Year's Resolutions