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HistoricalPEGuy (63.03)

CAPS and Exponential Growth

Recs

19

November 24, 2007 – Comments (18)

It is nice that you can be an all star in CAPS and actually play the game like you do in real life.  Interestingly, I think you'll see, in about 5 years time (if this thing is still going - I think it will) people who wait and hold some killer companies will start dominating CAPS. 

Here is an example....

You bought XYZ corp at $5 and several years later its at $30.  The Market is up 25% in that same time period, so you've got 475 points in your CAPS.  That's pretty good.  You've done well and sleep soundly that night.  You wake up and great news, the stock pops 10% that day.  That's good, 10 more points, right (if the market is flat)?  Wrong.  You now have a stock that's at $33.  You're up 560% on your stock.  You just added 60 points!  When people start putting up big gains like that, these short'em quick players won't be able to compete as easily.  They simply can't get exponential returns like thumbs up players can.

I watched a video interview with TMFEldrehad and he said something to this effect, I wasn't sure what he was trying to say at the time, but I think this is what he meant.  Math rules!  It'll be neat to see if we get some players to come out of the woodwork and start taking over the shorties!

Cheers.

-- HPEGuy

18 Comments – Post Your Own

#1) On November 24, 2007 at 12:21 PM, GS751 (27.56) wrote:

I agree 100%.  Its hard not to get caught up in all the speculative bs.  I do a lot of speculating in CAPS versus the way I invest in real life.  I'll quote Buffett (a couple times) on this one
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." 
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
"Our favorite holding period is forever."
Great post man, your going on my favorites list.

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#2) On November 24, 2007 at 12:25 PM, zygnoda (26.94) wrote:

At least a couple of the top fools have said what you are saying (one being TMFEldrehad).     'You're up 560% on your stock.  You just added 60 points!  When people start putting up big gains like that, these short'em quick players won't be able to compete as easily.'              You can really see it with the scores for DRYS... 

It'll be fun to see what happens with the scores and the top spots.

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#3) On November 24, 2007 at 12:42 PM, MakeItSeven (31.82) wrote:

Actually, CAPS points, as explained above, are given with a bias towards long-term long positions, far detached from real life.  In real life, if your stocks go up 20% for the year then you make 20% for the year, not some ridiculously huge profit just because you bought those stocks 10 years ago for a lot less.

While I understand why it was done that way, the side effect of that decision is that it might drive people towards picking low-priced stocks in the hope that they might go up 10, 20 times later and simply dominate the CAPS point system with just one or two of them.  It might not be a good thing to encourage people to buy BB and PK stocks.

Anyway, looking at the 500 percenter list right now I see that the vast majority of people got there by FLSR.   FSLR happens to be a two-star due to a lot of red thumbs from CAPS all-stars.   FSLR is up over 600% this year so anybody who jumped in earlier this year will have a big advantage in CAPS score over those who joined CAPS a few months later.

So, in the end what is it supposed to mean:

1) A lot of all-stars got there by pure luck and can't see how good FSLR is despite being proven wrong by the market so far.

2) People who pick FSLR are lucky and get to be all-stars thanks to its score alone (one all-star has 514 CAPS points, 532 comes from FLSR).

The premise of long-term investment is based on the basic belief that the market is not efficient.  Therefore, if one sits down and does careful research (as opposed to the ignorant mass out there who do not realize it) then one might be able to find a holy grail of a stock which will go up several times each year if he is patient enough to hold on to it despite all the fluctuations.

Personally, I believe that it's a myth, driven by the successes of a few high-flying stocks (after the fact, of course) and the greed of the people who admire them and wish they had bought them earlier. 

The long term success of a portfolio depends more on its composition to match the macroeconomic condition at the time, not by poring at the 10Q and whatnot to find the one stock that will do well for the next 5, 10 years.  Seriously, did anybody who picked FSLR 10 months ago could see from the info available at that time that it would move up over 7 times in 10 months ?   Did anybody looking at the homebuilder's earning reports 2 years ago would want to short the stocks instead of buying them ?

This CAPS bias towards stocks which were bought at much cheaper prices might cause people to hold on to stocks past their time in the hope that they will get an oversized return on their CAPS scores.  That is not a good thing for CAPS in its objective to represent a non-biased collective opinion, driven only by potential future gains, not the purchase prices in the past.  

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#4) On November 24, 2007 at 8:12 PM, dwot (45.74) wrote:

I  use this logic in reverse on my under performs.  The most you can get on an under perform is about 100 pts.  However, start with a $100 stock and end it regularly...

at $90 you get 10%,

at 81 you get another 10%,

at 73 you get another 10%. 

at 66 you get another 10%

at 59 you get another 10%

at 53 you get another 10%

at 48 you get another 10%

at 43 you get another 10%

at 39 you get another 10%

at 35 you get another 10%

at 31 you get another 10%

at 28 you get another 10%

at 25 you get another 10%

at 22 you get another 10%

at 20 you get another 10%

at 18 you get another 10%

at 16 you get another 10% 

at 14 you get another 10%

At some point the market cap gets to 100 million and then you get another 100 points to bankrupcy. 

 Math most certainly does rule... 

 

And, I never took my under perform off of DRYS for that very leverage reason.  I was -500 on that one at one point and it dropped 5% and I got 50 points.  I expect DRYS to give me back most of what it took, if not all.

 

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#5) On November 24, 2007 at 8:13 PM, dwot (45.74) wrote:

oops, 5% 25 pts...

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#6) On November 25, 2007 at 2:29 AM, HistoricalPEGuy (63.03) wrote:

Wow - what great posts!  Dwot's argument for underperformers is a great one for this game.

MakeItSeven also has a wonderful point -- just buy penny stocks and keep your fingers crossed!

But the overall point in my message is that somebody, somewhere is going to pick some solid stocks and actually hold them.  I hope I'm one of those people.  It'll be neat to see if it actually holds the promise of what I've fortold. 

Fool on!

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#7) On November 26, 2007 at 4:32 PM, TMFEldrehad (99.99) wrote:

Nice blog subject!  :-)

And yes, you pretty much nailed what I was trying to say.  While re-upping some underperform calls does help close the 'score gap', you understood what I was trying to say quite well - namely that successful outperform calls build score at a faster and faster rate as time progresses.

Letting outperform calls run and re-upping underperform calls is a strategy that has a lot of merit (and that I have used), but there are some interesting sidepoints that don't often get mentioned.

First, it's possible to be sitting on a successful outperform call, have the stock underperform the market from that point for a time, and still increase one's score - how cool is that?

For example, imagine you are sitting on a double and the S&P has been flat.  Over the next year, your stock goes up 5% more, and the S&P goes up 8%.  Lose 3 score points?  Nope.  You gain 2.  Your 5% gain in the stock is a 10% gain relative to the original pick price - compare that to the 8% gain in the S&P, and you gain 2 score points.

One other thing that is often missed is that re-upping underperform calls doesn't necessarily traslate into a higher score.  Take, for example, an underperform pick that does what it's name implies, underperforms the S&P, but both the pick and the S&P are trading higher (the S&P just grew at a faster rate).  What happens if we re-up this one?  Well, we reset the pick's cost basis, but we also reset the S&P's cost basis.  As it turns out, from a score perspective, we're better off letting this one ride due to the score benefit from the continual compounding of the S&P.

Again, in a lot of situations it makes a lot of sense to let the outperformers ride and re-up the underperformers - but this isn't always the case, and there are exceptions on both sides.

-Russell (TMFEldrehad)

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#8) On November 27, 2007 at 9:39 AM, TDRH (99.49) wrote:

Great post HPE,

            The long term buy, hold, & grow will win out over time without a doubt.   The frustrating thing for me is trying to identify the long term growth areas and separating them from high flying cyclicals.   Dry bulk shipping, mining and the drilling contractors are a  good example.  These are smoking under current conditions, but just as they rise to multiples, they will eventually correct in multiples.    It would be great to find the next Amazon or Google, but it is like finding a needle in the haystack.

          Long term, diversified investing will lead the scoring, but these investments will still need to be managed and pruned.    In an ideal situation, you would have core investments with steady long term, compounded growth with some % in speculation to try and time the cyclical waves.  Timing is everything, and so far my timing has been poor.

James

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#9) On November 29, 2007 at 8:59 AM, TMFBent (99.80) wrote:

This blog post is very interesting, but seems to me to suffer from a fundamental error in its assumptions.

When people start putting up big gains like that, these short'em quick players won't be able to compete as easily.  They simply can't get exponential returns like thumbs up players can.

This statement presumes that the score leaders in this game, who have been clever enough to figure out how the scoring works, leverage their picks accordingly, and make many astute, market-beating calls, will somehow now not be clever enough to find and hold long-term winners.

I don't believe that's true.

This is another way of saying that the quick turnover strategy (expecially with red thumbs) and holding good, long-term winners strategies are not mutually exclusive in caps. I expect the long-term eaders in this game will be people who can do both, not people who dogmatically adhere to any one strategy because it mirrors their real-world portfolio or suits their underlying beliefs about investing, or because it works in the short run.

If I may climb up on the crate and get more broadly philosophical, throughout all of Caps, I detect what I believe to be an unhealthy "us vs. them" mentality from time to time. Caps is the place where we should be trying out what "them" thinks, even -- no especially -- if it seems to us to be completely wrong. There are few other sandboxes where you can learn so much with a little time.

Sj

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#10) On November 29, 2007 at 10:53 AM, ctojeira (41.11) wrote:

What I really enjoy about this blog is that it is giving me the realization that CAPS means something different to everyone.  Some of you look at it as a game, with the goal being to achieve the highest score possible...  finding ways to "beat the system" in order to march to the top of the leader board.  For others, it's a way to test stock picking strategies.  It's a way to share ideas, to supplement your research and to gain some insight as to what the investing community is feeling at any given moment.

 Whatever your goal or philosophy is, I think we all agree that CAPS is here to help us to become better investors.  I thank you all for the information you share.

And thank you, HPEGuy for another great post!

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#11) On November 29, 2007 at 3:21 PM, minimidgy (96.93) wrote:

TMFEldrehad said that he was going to try to start picking more outperform calls (from what I remember)

 HIs last 47 picks, with dates ranging from 8/14/07 to 11/27/07, have all been underperform calls.

 Nice, post, though!

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#12) On November 29, 2007 at 11:19 PM, FleaBagger (28.14) wrote:

TMFBent is exactly right:

I detect what I believe to be an unhealthy "us vs. them" mentality from time to time. Caps is the place where we should be trying out what "them" thinks, even -- no especially -- if it seems to us to be completely wrong.

It's by learning from quick-draw traders and grafting their trading strategies onto my existing picks in my Roth IRA that I intend to juice my returns in volatile but good stocks, dwarfing my commission costs as I capture 10-20% swings with no tax liability. (By the way, this tax-free trading strat was also inspired by the system-gaming CAPS encourages.) Bottom line: I hope this isn't illegal, and I may lose money doing it even if it's licit, but this is good experience, fun, and it's money I'll have plenty of time to replace before I need it anyway.

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#13) On November 30, 2007 at 10:46 AM, TMFEldrehad (99.99) wrote:

For the record, minimidgy, while my last 47 picks have been underperform calls, the vast majority of them are re-ups (I cancelled one underperform call and immediately made a new one to replace it).  My overall outperform to underperform call ratio is actually pretty close to 50/50.

Anyway, I agree with Seth in that the long-term successful CAPS players will be those who are, indeed, able to perform well with both types of calls.

-Russell (TMFEldrehad)

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#14) On November 30, 2007 at 12:59 PM, HistoricalPEGuy (63.03) wrote:

TMFBent and FleaBagger - just what I would expect from a couple of Shorties!

Just Kidding.  But a little rivalry is healthy.  Forget the jealous people.  Forget the whiners.  We should seriously listen to the benefits of shorting and going long.  In addition, we should be able to take constructive criticism and a little ribbing along the way.  Remember, that "Amuse" is part of this as well. 

The fact remains, anyone who takes the "If you short, you aren't a real investor" thing too far, is really just jealous of you.

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#15) On November 30, 2007 at 6:55 PM, FleaBagger (28.14) wrote:

HPEG,

Right on, bro (at least your last post). And by the way, the only reason I have any red thumbs at all is because I don't know 200 stocks that I think are going to be way higher 5 to a zillion years from now.

So let's all make money, learn, and have fun! Amen?

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#16) On November 30, 2007 at 8:55 PM, HistoricalPEGuy (63.03) wrote:

Amen!

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#17) On December 02, 2007 at 3:25 PM, TMFSpiffyPop (99.44) wrote:

ctojeira wrote:

What I really enjoy about this blog is that it is giving me the realization that CAPS means something different to everyone.

14 Ways to Use CAPS... and Counting...
http://boards.fool.com/Message.asp?mid=24734537&sort=whole

 

Fool on,

David 

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#18) On December 18, 2007 at 5:03 AM, tuffsledding (34.91) wrote:

Johnny come lately to this thread, but I want to add one observation: Keep in mind that the premis of the long-term benefits of compounding is that the market (or at least your picks) keep going up. The trouble is that it works in reverse when your hot solar play or China play drop by 10% in a day. If you enjoyed a big compounded gain, your loss is also magnified. Many of us are seeing this phenomenon now. Your best performers are now dropping like rocks.....

Fool on,

Tuff. 

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