A question from an Idiot about the S&P comparison
I'm not sure it's good to be a Fool these days, so I'll refer to myself as an Idiot when asking this question I'm sure has been asked and answered many times.
Why is our stockpicking performance measured against the forward performance of the S&P index? By what economic theory is this not a completely arbitrary metric of the value of our judgment?
Hypothesize two financial advisors, Bareman and Bulgai. Both are avid CAPS players and generate most of their accounts through their CAPS ratings. A year ago both of them decided to put a rating on Transionic Radiation Devices (TIRD) when it was trading at 10. Bareman gave a red thumb and recommended a one year short position. Bulgai gave a green thumb and recommended going long for a similar time course.
Over the next year TIRD steadily dropped to 7, a 30% decline. In the same time period the S&P dropped 40%. A 1000 share short based on Bareman's call would have profited $3000. The long investment recommended by Bulgai would have lost $3000. Although Bareman made money he wound up losing 10 CAPS points. Bulgai crapped the bed but made 10 CAPS points.
Despite the CAPS ratings you decide Bareman is the guy for you. Unfortunately when you contact him he tells you he had to sell his business to Bulgai since his <20 CAPS rating couldn't compete with Bulgai's 99.4.
Is this metric based on the assumption that all monies not invested in equities are placed in an S&P index fund? Why make this assumption? Why not cash? Or an S&P short fund? Or grade A Colombian white? If the market is going to tank, I want to be short or I want to be out. I don't want to be long in equities that don't suck quite as much as the others. And if you devalue the scores of the market callers, how will I know who to listen to?