We recently read the Yahoo news story of Ddalgi (Korean for “Strawberry”), a five-year-old parrot from Papua, New Guinea, who competed with 10 human investors in a stock-picking contest in South Korea.

Strawberry’s stock market picks reportedly posted a 13.7% return. While not good enough for first, the result put her in a respectable third place. Her human competitors, on the other hand, posted an average loss of 4.6%. (The story reminded me of a Globe and Mail stock-picking contest in which I was pitted against eight other human competitors and a plastic Santa. More on that in a moment…)

Stories like these are not uncommon, and are not limited to stock-picking contests. You may have heard of Maggie the Monkey, who makes yearly hockey playoff picks that routinely beat those of human analysts.

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While these contests certainly make for eye-catching headlines, the method used for determining Strawberry’s stock market picks holds some useful knowledge for investors.

Buying high-quality stocks and holding them for long periods beats short-term trading strategies

During the six-week contest, the bird was given just seven chances to make her stock market picks. She did this by using her beak to randomly select balls representing 30 blue-chip companies. There were no restrictions placed on the humans, who mainly chose to invest their imaginary money in small to mid-sized firms.

Picking blue-chip companies probably helped Strawberry’s results. However, her human competitors made an average of 190 trades during the six-week contest. There’s a large random element in short-term stock-price fluctuations, and that’s especially true of small and mid-sized companies, like the ones Strawberry’s human competitors chose to invest in.

It’s possible for some short-term trading newcomers to make stock market picks that do surprisingly well at first. Eventually, though, the odds catch up with them. That’s why most short-term traders wind up losing money. By the time their beginners’ luck fades, many are trading in dangerously large quantities. An average of 190 trades over six weeks certainly qualifies as a dangerously large number of trades.

Like Strawberry, we try to invest in such a way that the random fluctuations even out over long periods. That way, we profit from the near-inevitable long-term rise in the value of high-quality companies. This is the approach we follow when we recommend stocks in our four newsletters, which you get when you become a member of Pat McKeough’s Inner Circle.

Our long-term approach led to success in stock-picking contests

As I mentioned, I’ve competed in The Globe and Mail’s annual stock-picking contest a number of times over the years.

Each competitor is allowed to pick only one stock in the Globe’s contest. I won the 1997 event with my selection of Corporate Foods (now Canada Bread, symbol CBY on Toronto).

In the 2000 event, I was pitted against eight other competitors and a plastic Santa.

I’m happy to say I beat all of the human investors with my pick, CAE Inc. (Toronto symbol CAE), which returned 146.5% over a one-year period. Results of human stock-pickers ranged from my 146.5% in CAE, down to a 100% loss (the second-worst performer lost 70.2%). But the plastic Santa bested us all with Denbury Resources (symbol DNR on New York), which went up 179.2%.

Like the parrot story, this shows the random element in investing. It’s just one more reason why you should follow our advice and build a balanced, diversified portfolio of mainly high-quality, dividend-paying stocks, spread out across the five main economic sectors.

Our approach helps you avoid overloading yourself with stocks that are about to slump because of industry conditions or a change in investor fashion. You also increase your chances of stumbling upon a market superstar — a stock that does two to three or more times better than the market average.

If you’d like to ask me about stocks you’re considering buying (or selling), or if you have any other investment-related questions, you really should join my Inner Circle service. Click here to learn more.