CAPS Community the Subject of Harvard/Yale Research
Well, now we have it, documented proof that you are The World's Greatest Investment Community. Over the past year, Professors Chris Avery and Richard Zeckhauser from Harvard, and Judy Chevalier from Yale have assessed the value of the CAPS stock ratings system that you have been building. Avery and Chevalier are world class behavioral finance researchers and data crunchers. Zeckhauser, the senior professor, has a broad set of academic interests, was previously a general partner with Victor Niederhoffer in an investment bank and hedge fund, and is a world class bridge player. The results of their study, similar to previous data that we have released, are outstanding. You can view their research here.
Some of their summary conclusions include:
* On average, an individual pick in CAPS outperformed the S&P 500 index by 4 percentage points in the twelve months after the pick. We use a four-factor regression framework to estimate the excess returns associated with portfolios that aggregate these picks; a portfolio of the most popular CAPS stocks yielded excess returns of more than 18 percentage points annually relative to the portfolio of the least popular stocks.
* We find consistent evidence that CAPS picks yield information that predicts future stock market returns for individual stocks.
* ...these results suggest that CAPS participants possess price-relevant information that is far from systematically incorporated in market prices.”
* These excess returns are of a greater order of magnitude than those from any previous study in the literature, which typically finds excess returns on the order of substantial basis points rather than double-digit percentage points.
This particular study attempts to track CAPS alpha using indexes based on our 1-5 star quintiles with various re-balancing frequencies (e.g. 3, 6, 9 and 12 months). The study is based on data through 2007 and projects forward returns on the indexes through the first half of 2008. The Harvard/Yale team complete a Fama and French 4-factor analysis to see if CAPS rating excess returns could be fully explained by these factors--viz market returns + beta, market cap, price-to-book, or momentum. Adjusting for these key market forces, CAPS alpha persists in this study. We plan on continuing the study with the Harvard/Yale team to look at complete 2008 results, and beyond.
Not a week goes by in which there isn't a spirited debate on CAPS about the strengths and weaknesses of our system design. It's great. I love the feedback because we always get great ideas from the CAPS community, and it keeps the pressure on us to continuously explore alternative models. And you should know that on a regular basis we test alternative designs/rules to the current CAPS system. We're about to kick off another round of tests next month in fact. The only time I feel at all defensive about these debates is when someone casually dismisses CAPS as a game. Okay, sure, it's game. It’s a game within a game (the stock market)--the biggest game in town! But make no mistake our core mission is to generate meaningful stock research. We're here to learn, compete, and, through the diversity of inputs that come out of our collaborative research, generate market beating community intelligence. So, keep our more noble pursuits in mind Fools, and by all means continue to help us to make CAPS a better research tool.
2008 was a remarkable year in many ways, both for the collapse in the markets and for the downfall of many "market experts." I'm glad to be navigating these markets with you Fools.
Thanks for helping to make CAPS smarter.