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CAPS Community the Subject of Harvard/Yale Research

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April 17, 2009 – Comments (25)

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.

25 Comments – Post Your Own

#1) On April 17, 2009 at 10:36 AM, kdakota630 (29.65) wrote:

They didn't mention me by name, eh?  Hmmm... interesting.

Anyway...

That is great news, and the results of their study don't come entirely as a surprise.

A couple of notes:

1)  Thanks for the avatar change, TMFJake.

2)  Is anyone else having a problem with the "following" feature lately?  As of yesterday I believe, I can't "follow" blogs unless I reply and click the "follow" box there.

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#2) On April 17, 2009 at 10:37 AM, dudemonkey (40.40) wrote:

This is awesome news!

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#3) On April 17, 2009 at 10:46 AM, TMFJake (80.51) wrote:

kdakota630: An oversite I'm sure.  I thought there was a reference in several sections to "thanks to smat stock pickers like kadakota630..."  Must have been accidently dropped in final editing.

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#4) On April 17, 2009 at 10:58 AM, RonChapmanJr (96.78) wrote:

I'm surprised the Harvard professors bothered to interact with the Yale professor.  They obviously could have done the research without her.  :) 

Glad to hear the positive results. 

ron, Harvard '03

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#5) On April 17, 2009 at 11:22 AM, kdakota630 (29.65) wrote:

TMFJake

Yeah, you're probably right.  LOL.

Further to my issues with the "following" feature, when I'm clicking my tabs, I get an error page when I click the "following" tab and follow it by clicking the "blog" tab.  Any other combination or order works just fine.

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#6) On April 17, 2009 at 11:30 AM, anchak (99.86) wrote:

Utterly enjoyable paper.....they have no clue how much CAPS beat the pants off the market post the Oct 2007 period.....

 

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#7) On April 17, 2009 at 11:49 AM, portefeuille (99.69) wrote:

Both of these results suggest that CAPS participants possess price-relevant information that is far from systematically incorporated in market prices.

I would suggest that the opposite is more likely to be true.

It is the absence of insider knowledge that helps.

I hope I am closer to George Soros or Jim Simons or Hugh Hendry than Warren Buffet.

This is from an article on Hugh Hendry:

The investment style for the main Eclectica fund is broad — any asset category goes — and the approach unconventional. Mr Hendry never looks at brokers’ research, never meets company managements and is deeply sceptical of daily news flow. The style seems contradictory at times. He believes in not following the herd, yet he has an enormous respect for the market. The Eclectica website proclaims: “The market has infinite wisdom; it is divine.”

“I’m a Joan of Arc-type manager; I hear voices in my head,” he says when I ask how he picks his investments. In the course of a two-hour interview he twice more refers to voices in his head. One moment he appears egocentric: “I want to be known as the man who bankrupted Iceland,” he says of his current short positions in the krona, likening himself to his hero George Soros, whose bets helped to force the pound out of the exchange-rate mechanism on Black Wednesday. The next, he is self-deprecating, saying that he has no friends and doubts about his abilities. “No one wants to work with me. I’m a trouble-maker. I’m a bit of a circus freak.”

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#8) On April 17, 2009 at 11:59 AM, portefeuille (99.69) wrote:

Mr Hendry never looks at brokers’ research, never meets company managements and is deeply sceptical of daily news flow.

That is of course the "relevant part".

And maybe this: I hear voices in my head,” he says when I ask how he picks his investments

And I meant to say: ... than to Warren Buffet.

(I tend to have an allergic reaction to phrases like "buy what you know" ...)

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#9) On April 17, 2009 at 12:28 PM, Tastylunch (29.39) wrote:

Congrats TMFJake and team!

 

portefeuille

I think that's a good point, I've studies that show how well young children do at picking stocks. Sometimes more insider knowledge cna be more harmful han less

 

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#10) On April 17, 2009 at 1:54 PM, TMFCHarris (99.57) wrote:

kdakota630,

I can't get that to replicate. If it is still broken for you, can you drop me a line via the feedback page (use Report a Bug, please) and we'll see if we can't figure out what's up.

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#11) On April 17, 2009 at 2:09 PM, Melaschasm (63.77) wrote:

I thought I posted this a couple hours ago, but it does not appear to be here.

This research is great news for the CAPS community.  Once the data for the rest of 2008 is available, we will have a much better understanding of the quality of the stock picking on CAPS.  So far we know that CAPS has been beating a Bull market.  Soon we will know how well CAPS did against a market crash.  If CAPS ratings still do better than the S&P during all of 2008, this will truly show an amazing value for CAPS data.

 

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#12) On April 17, 2009 at 2:28 PM, portefeuille (99.69) wrote:

I want 100 shares in the "caps" ipo (maybe the Gardners could just buy CAPS, if yahoo is correct it has an enterprise value of approximately -43 M$, so it would not even "cost" them anything (in that case I would take 1000 shares unless they start with an inverse stock split)).

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#13) On April 17, 2009 at 2:32 PM, TMFJake (80.51) wrote:

portefeuilleGreat idea! ;)

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#14) On April 17, 2009 at 2:35 PM, portefeuille (99.69) wrote:

I did some virtual front running already (see comment #14 here) ...

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#15) On April 17, 2009 at 4:06 PM, Alex1963 (28.76) wrote:

Jake,

great post. I knew I was smart for joining Caps. Now I just have to keep my swelled head in check LOL

When I 1st took an interest in me and my wife's torpedoed portfolio in Nov '08 I mentioned to my broker that I was getting my picks from Motley Fool. Not surprisingly he gave me a little spiel on why "they" aren't too wild about us here. Huh. Well my picks have taken our portfolio from -40 when it was entirely in his hands, to -23% in just 6 months. In other words my performance is so positive it is dragging his up kicking and screaming. His lack of comment on the success of my picks which he knows by and large originate from Caps is conspicuous in it's absence IMO. Hah! Take that Smith Barney! I would send him a link to this study except having a bunch of "street" players flocking to Caps would surely skew a successful (& brilliant) system right into the crapper!

Thank you again for a great post

Alex 

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#16) On April 17, 2009 at 6:28 PM, portefeuille (99.69) wrote:

I have found the time to actually read the paper by now.

I have some recommendations/ideas and think that one conclusion they draw (on page 21/39) may not be correct.

Are you (or is someone else at the motley fool) involved in the study to the point that we might discuss questions/suggestions we have or should I rather contact the authors?

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#17) On April 17, 2009 at 7:17 PM, TMFJake (80.51) wrote:

portefeuille: You can email me your responses (jkeeling@fool.com). Thanks! 

Alex1963:  What a great story! Yes, keep the study away from your broker! :) 

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#18) On April 17, 2009 at 7:36 PM, fatdiesel (96.71) wrote:

* ...these results suggest that CAPS participants possess price-relevant information that is far from systematically incorporated in market prices.”

This is a statement right from Harvard smart  (Thanks Bill Mann wherever you are!).  The system in systematically is fundamentally flawed.  Market prices do not understand this simple concept: Margin of Safety.

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#19) On April 17, 2009 at 10:05 PM, rd80 (98.59) wrote:

"Similar to Amazon.com (but in contrast to eBay), it is not clear what material benefit a participant gains from garnering a positive reputation on CAPS."

Not clear !?!?.
Hint to authors:  Lucky charms and Foolish hats on our CAPS pages of course.  

All kidding aside, very good read.  Congratulations to TMF on the positive report.

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#20) On April 17, 2009 at 10:48 PM, SuperPicks (29.19) wrote:

That is good, but now that we are in April of 2009, I am surprised not to hear about the results of the study through 2008.  My skeptic hat tells me that if that research is applied consistently as it was through 2007 as mentioned above, to the year 2008, that it would give possibly overall opposite results.  There was a tremendous avalanche of red (point losses) felt my numerous CAPs player as a result of the commodities bust.  During this time commodities were almost universally loved by CAPs players.

Then ofcourse not to mention the continual crash fall/winter '08 wiped out many as well. 

Data through 2007 afterall is data through a very bull market. 

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#21) On April 17, 2009 at 11:33 PM, TMFJake (80.51) wrote:

SuperPicks: Definitely more to come.  I can tell you that the CAPS community did quite well on energy and commodity stocks in the first half of 2008, although you're right that these stocks feel very hard in the second half of the year.

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#22) On April 18, 2009 at 2:16 AM, dwot (95.70) wrote:

So...

Is that like saying CAPS players lost less?

I just peeked at the research.  It ends in Nov 2007. 

I would like to see how CAPS did in the bear. Report this comment
#23) On April 18, 2009 at 4:36 AM, hall9999 (99.54) wrote:

  "Further, even picks by players with quite low ratings – presumably the least predictive among all picks in the CAPS system – produce significantly positive scores over time. Indeed, they perform only slightly worse than picks by players who have no track record and are unrated. These results suggest that there are no truly bad raters among CAPS participants."

  Well that is one conclusion that has been shot to hell by this bear market.  Right now about half of all players have a negative score so perhaps there are many "truly bad raters" among CAPS participants. 

  Another significant finding is the large influence of 'Momentum'.  I have certainly noticed that when a stock's momentum increases its pick activity increases.

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#24) On April 18, 2009 at 7:33 AM, TMFJake (80.51) wrote:

dwot:  More to come later this year.  The Harvard analysis projects performance through the first half of 2008, since they're using an infrequent re-balancing strategy.  

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#25) On June 07, 2009 at 11:50 PM, CVMp (91.38) wrote:

Q3 and Q4 had horrendous performance by CAPS which likely negates advantages from the earlier study.

 

 

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