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A question from an Idiot about the S&P comparison



February 23, 2009 – Comments (14)

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? 

14 Comments – Post Your Own

#1) On February 23, 2009 at 4:16 PM, Rehydrogenated (33.87) wrote:

There are hundreds of stock portfolio "games" out there where there is no benchmark for the points system. If you don't like Caps go play one of those. The game is similar to trying to get a positive Alpha, a number fund managers use to tell if they are going to get fired this year or not, irregardless of whether their fund made or lost money.

I do think the benchmark should be something different than the S&P though. Maybe a more world-encompassing ETF or mutual fund that includes commodities, real estate, etc. Something like a standard pension plan portfolio.

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#2) On February 23, 2009 at 4:17 PM, uvcfool (29.81) wrote:

The way Fool system is setup, you are expected to perform like a Hedge Fund Manager with Long-Short strategy. Mostly, Hedge fund manager is long on the strongest security in a sector while shorting the weakest security. However, in the Fool system, one of the security you are hedging is always the S&P index. Typically, Hedge fund managers are judged against S&P Performance (the benchmark).

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#3) On February 23, 2009 at 4:21 PM, briyan (< 20) wrote:

You can complain if you like but you have to accept and understand that CAPS is not measuring any kind of real-world portfolio performance, it is merely a game with special rules.

A CAPS pick is a bet on stock's performance relative to the S&P500, not a recommendation to buy.  A green thumb is not a recommendation for a long position.  A red thumb is not a recommendation for a short position.  If you make those assumptions, you are the one in error, not the CAPS game.

As many others have said, there are tons of sites where you can create mock portfolios and measure actual performance ... this is something different and you have to interpret people's picks based on the rules at hand.

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#4) On February 23, 2009 at 4:26 PM, Alex1963 (27.86) wrote:


Excellent post and metaphors.

I invested in Columbian white recently and no longer care about my Caps score. Thumbs up LOL



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#5) On February 23, 2009 at 4:30 PM, Rehydrogenated (33.87) wrote:

You know...I wish we could pick our favorite spirits as Caps outperforms/underperforms. I just invested in a large crate of aged belgian beer that will undoubtedly outperform the market.

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#6) On February 23, 2009 at 4:44 PM, angusthermopylae (38.21) wrote:

"Or grade A Columbian White?"

 If only there was a way to rec more for phrases like that!!!!!

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#7) On February 23, 2009 at 4:55 PM, BigFatBEAR (28.43) wrote:

From one highly-rated Fool to another (and yes, Fool sounds a lot better than Idiot!)...

I think that CAPS was created with the idea that we wouldn't necessarily be facing the massive downturn that we are now.

In a bull market, CAPS is a totally different universe, and the incentives for investing are totally different as well. You'd be slightly crazy to benchmark against an inverse S&P fund, or cash, or columbian coke during a bull market. That's because not many people short the market, hold 100% cash, or horde the blow when stocks are rising.

Simply, the S&P is the benchmark that "experts" and hedge funds are supposed to outperform with their picks. CAPS simulates this by putting you in the driver's seat to be a stock expert.

I do agree that there should be some sort of reward/penalty for generating positive profits (ie, a long stock actually went up, instead of just falling less than the market, and vice versa for shorts). But I'm mostly content with the way CAPS is set up.

In my real portfolio, I rarely try to beat the market for long-term holdings, but if I did want to, I'd know who/where to turn to for outperforming.

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#8) On February 23, 2009 at 5:01 PM, jmt587 (99.49) wrote:

And "crapped the bed."  Hilarious.

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#9) On February 23, 2009 at 5:11 PM, Tastylunch (28.66) wrote:

I think you are supposed to"listen" to the star ratings, not the raters.

But yeah I agree relative outperformance only tells you so much. I think CAPS needs an absolute performance metric component

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#10) On February 23, 2009 at 6:09 PM, dwot (29.16) wrote:

I am with Tastylunch.  CAPS only makes sense in a bull market and its scoring ignores the most basic performance, that of a savings deposit of some kind.  The S&P is down in the range of 46% from its peak, when I sold everything and I basically went 100% red thumbs at the time in CAPS.  Out of my 68 still open picks 46 would have lost you money if you bought them so you would have been a winner selling them, yet I am losing on those picks in CAPS.

I think the absolute performance metric component should have been zero, when the market is tanking if you sold then it should have been measured against zero loss.  Then you'd see who really made money, or at least didn't lose, and who lost.  There are some players with great CAPS scores that probably lost 1/3rd of their portfolio.  Good for them for not losing 45%...  I am a little jaded here because there have been a few that gave me a rough time about going 100% red thumbs...

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#11) On February 26, 2009 at 11:56 PM, zzlangerhans (99.75) wrote:

Thanks for the feedback. I'd rather not just leave and join another site after the time and effort I've invested here. I've learned a lot from CAPS, especially how the market can be played in both directions so I don't have to simply grab my ankles and sing Grgeorian chants when the Dow drops 500 points. But I think that there's a lot of room for improvement and it's disheartening that the only change on the site in 2 years is the recent cosmetic downgrade. CAPS stock ratings are worthless and I never look at them. All I want is to know who I should be listening to and who I should ignore. But I can't separate the point whoring .OB bid/ask crap and red thumb reloads from the people who actually know how to survive this market. The S&P metric is just another obstacle between me and those real market winners hidden in the top 500. Seeing dwot, Tasty, and bigfat on my side makes me wonder if one day some top contributors could get a mutiny together. No need to dismantle CAPS, just put more energy into analyzing individual player data - e.g. adjust score to eliminate the S&P metric, separate red thumbs and green thumbs, ignore .OB and .PK scores, ignore accuracy, etc. More on this later. 

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#12) On March 01, 2009 at 5:28 PM, Tastylunch (28.66) wrote:

Well I disagree with you there ZZlangerhans

you may think the ratings are worthless but the are the point of the exercise for the Fool (and why they bother to run the site)

I don't think the raters should be the point or are the point. The point should be the ratings since that's what the Fool can use data wise.In order to generate community intelligence CAPS needs as much activity as possible

I think redthumbing trash adds value  in that it warns new investors away from Pump and dumps and their ilk. I gte new players asking me all the time if so and so .OB is a good buy. Belive it or not people get suckered into these things all the time in real life.However there are several .PK stocks like Nintendo that are foreign nationals and are legitimate companies though so baning them all seems like throwing the baby out with the bathwater to me as well.

The reason I think we need an absolute metric is I think it will improve the star ratings.  I personally think the 1 and 2 star rating are more accurate than they 4 and 5 stars and I think that's because too many people hold open longs hoping beaten up 4's and 5's they will come back.E.g. why did BOLT and DWSN maintain a 5 star rating through 60% drops? They shouldn't have if community intelligence is working.You put in an absolute metric and I think you will cut down on that a lot as it will add more pain to holding ad infinitum.

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#13) On March 24, 2009 at 11:18 AM, TMFJake (88.34) wrote:

uvfc accurately describes our objective with the design of CAPS.  In an up and down markets, our scoring system would make you money, assuming your portfolio was constructed with pairs that are consistent with the CAPS scoring system:

* CAPS Outperform / Short SPY

* CAPS Underperform / Long SPY

Yes, in this scenario, Bareman's paired position is down 10% while Bulgai's  position is up 10%.

Now, I understand that you, zzlangerhans, are interested in better tools for measuring performance.  While CAPS is deliberately not a traditional portfolio game, I agree that we can do a better job of helping you to find CAPS members with the best returns on Outeperform or Underperform Calls in isolation.  We could also provide a filter to filter out OTC stocks too.

We're a ways a way from developing a really powerful player screener, but we might be able to turn these out as Top Tens Page Lists relatively soon.  Let me see what I can do.

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#14) On March 25, 2009 at 11:00 PM, SuperPicks (28.44) wrote:

I'm with ZZ's suggestion made a few days ago which I'll copy below here:

The real deal of what zz proposes (which I completely agree with, and so will most other CAPs players such as portefeuille):

Just add a tool that allows users to screen for different types of scores: green thumbs only, eliminate ETFs, eliminate .OB and .PK, correct for S&P metric, isolate sector, whatever the player wanted. The actual scoring and Top Ten would remain unchanged, but each player would be able to create an individualized list of Top Fools that suited his own investing purposes. And probably just a day of work to put in the code.


This was copied from the blog comment found here.


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