I don't blog much - I don't have a lot to say and don't ascribe much investing prowess to myself just because I happen to play this wonderful CAPS game fairly well. I ran across a post from roofman6 over on the CAPS feedback board, and was struck that he looked at the score of the current top "Fool" (that would be me - yay) and that he was concluding that there must be something seriously wrong in his investing when compared to those scores and percentages - and that was keeping him up at night. I thought it important to respond with another perspective - and some reassurance that he shouldn't be drawing the conclusions he apparently is. I hope roofman6 doesn't mind me using his post to launch this blog entry. Here is what roofman6 wrote:
I'm new to Motley Fool and I've been looking at the "players" records and some of them are just astonishing... accuracy of around 90% and annualized returns that would double or triple your money in a year. I'm not doubting the figures but what am I not seeing here? Why aren't investors and fund managers duplicating these player's buys and sells, or are they?
I did some calculations and the current top "Fool" looks to be doing over 300% rather consistently. Most of us struggle just to keep up with the market. Am I interpreting his record wrong? It's got me staying awake at night trying to figure out what I'm doing wrong.
One thing to note is that CAPS is a game - a stockpicking game - which is different than an investing game. I have played now for over six years and enjoy it immensely. While I have been buying and selling stocks for nearly 30 years, I have learned alot about the behavior of the market through my participation.
The game rewards several different types of behaviors - some of which indicate good investing prowess - and others indicate good game playing skills. You can see examples of all of the following in my CAPS portfolio and activity. For example:
1. long term small cap picks - when successful, these become really successful and can get you hundreds of points years later. For example, if GEOS goes up from 95 to 100, I get 50 CAPS points because the entry point was around 10. Those entering the pick today only get 5 points. This type of long time buy and hold translates well to real investing. I don't think you will find any CAPS player hitting even 70% of these picks - but the payoff is great. You can see many many such picks that I bombed on - sort on my closed picks by score and look for the big red numbers:)
2. Shorting junk - most of the top CAPS players have more shorts than longs. There is an incredible amount of junk out there (look at TMFStockspam). The strategy with some of these has been to harvest these everytime they go down 5-10 points - and then pick them again. This is game behavior that can get you several hundred points on a single short idea -when, in a real portfolio, the most you can hope for is that the company goes bankrupt and you don't have to cover - in effect, a 100% gain. In addition, in the real market world, these junk stocks are very difficult to make any money on - most of them can't be shorted. In CAPS, you can short them and feel good about identifying junk and getting lots of points.
3. The biggest point getter for many folks (I am one of the guilty here) is to short the reverse ETF's. These are all flawed instruments and are sure bets over the long term in CAPS. In a real portfolio, these ETF's are often difficult to short, and when you can short them, they are very dangerous. I have made money shorting TVIX for example since it opened. However, I came very close to disaster in August 2011 when the VIX spiked severely and I began to get margin calls. Fortunately, I was not overallocated and was able to ride out the storm and am back to making money on it still today. However, there were several occasions that fall when my broker warned me they were going to have to close out the short because they couldn't find shares to borrow. I got lucky and they never closed me out - but if they had, it would have turned an eventual winning trade into a severe loss. I put only a very small portion of my portfolio into these things. In CAPS, there is no risk of being closed out, getting a marging call, overallocating etc. - they are sure bets that get me hundreds of points every year. See my pitch for the volatility shorts like UVXY, CVOL, TVIX, VXX. With these, I just keep closing them and reopening them - without these types of tickers, I don't think anyone would have 90% or perhaps even 80% accuracy.
I have done very well in CAPS - but I am not anything remotely resembling an extraordinary investor. I do ok - but end up with results not all that far away from the market averages - some years I beat, some years I don't. I hope this helps you understand what is going on with some of the extraordinary accuracy scores in CAPS. For the most part, just ordinary folks playing a game very well. I hope this hasn't been disrespectful to the other top players who really are better stock pickers than I am.