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CAPS is a Failure



January 07, 2009 – Comments (12) | RELATED TICKERS: SAYCY.DL

News today the Satyam Computer (SAY) is a sham of a corporation is no big deal - bad companies exist and there will be another such company exposed in the future.  What truly bothers me is that
1005 Outperform ratings were on this stock, and only 29 underperforms.  As for"All-Stars" 178 Outperforms and 11 Underperforms. Only 6% of supposed All-Stars got this right, and I imagine its because most people don't do any due diligence when they pick stocks or ETFs.  It's completely all right to be wrong about a stock beating or not beating the S&P, but bankruptcy should have been seen by community long before it happened. I'm not going to toot my own horn simply because I called this right, but I'm disillusioned in the community to be this wrong about a stock. 

12 Comments – Post Your Own

#1) On January 07, 2009 at 7:17 PM, nthought (< 20) wrote:

Unless it's an absolute given that a stock is crap, the overperforms tend to always have the edge.  This is probably because people like to research stocks they are considering buying.  It might also be people pumping the stocks they own.  Except for people out to win this thing or people who are short sellers, most people have more overperformers rather than unders in their game.


You have to consider these things.  But you do have a point.


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#2) On January 07, 2009 at 7:47 PM, blake303 (29.54) wrote:

Identifying fraud and a financial distress are two very different things. The point of fraud is to cover up what would otherwise be obvious financial problems. If PriceWaterhouse missed it, why would you expect CAPS players to detect it? Furthermore, since you didn't comment on why you chose your pick, how do we know that you didn't just get lucky? You are right not to pat yourself on the back.

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#3) On January 07, 2009 at 7:48 PM, Har1en (99.05) wrote:

I disagree.  CAPS cannot predict fraud, and was not designed to do so.  CAPS is a rating tool that discounts the performance of the stock picks by the success of its members.  Undoubtedly, tomorrow, everyone who thumbed-up Satyam will have a lower (or much lower) CAPS score, and those imprudent investors will be given less weight in the system.

As the system ages, this will happen again and again.

Remember that CAPS is primarily an investor sentiment indicator that weights the best pickers over the worst.  It is better than PE, but it is only that, an indication of how people think about a certain stock.

Finally, fraud is not always detectable, even if you're doing due-dilligence.  That's why it's called fraud, because it's hidden.  If people knew about the real stats it would just be called poor performance, and the price of the stock would reflect it.

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#4) On January 07, 2009 at 8:12 PM, nuf2bdangrus (< 20) wrote:

I owned SAY at one popint, and was strongly considering buying it again.  But no one, even if they travel to India, can catch this from the outside.  In any company, if there is collusion, fraud can go undetected for a long time.  Remember Worldcom?  That's not CAPS fault.  If have posted my beef with MF newsletters, of which SAY was once a pick over a year ago... such as not advising how to invest as much as what to invest in.  Position size.  Averaging in.  Diversdification.  They make some pics, and in fairness, they do well in a bull market, when small CAPS tend to outperform. Also, CAPS doesn't address position WEIGHTING.  I'd give JNJ a larger piece than a small cap, just to manage risk.


I will tell you something else I have considered. If you were able to add up all of the outperforms and the underperforms, there would be more outperforms than underperforms.  ANd statistically, that's not possible.  Thus, the bias of long only investing and stockpicking shows up in the statistics.  Let the buyer beware.

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#5) On January 07, 2009 at 8:12 PM, TSIF (99.96) wrote:

CAPS is one tool in your arsenal. If it is your only tool, then use an investment firm.  I lost real money on SAY as well and huge points here on CAPS, but I'm moving on. Clearly you can vent, but in most cases that is none productive, The Yahoo board for SAY was pathetic and embarassing as an American.

Clearly you don't expect us to second guess or to have access to more data than Price Waterhouse?  Certainly here on Caps we should do better than Barclay's and Fidelities.....?

Good luck whereever you chose to go for your future advice...

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#6) On January 07, 2009 at 8:19 PM, undeletable (< 20) wrote:

It seems like a reasonable conclusion at first glance, but there is a difference between the work of due diligence and the work of a grave-digging short seller.  A claim of "due diligence" in the midst of fraud is dubious at best.  Our securities and reporting laws are what they are for a reason: their willful violation frequently makes due diligence a pointless exercise. Apart from extremely difficult and unusual finds like those of the talented Jim Chanos, doubts and good guesses are all that is left in a skillful cover-up, and especially a foreign one.  That is not the same thing as rational and reasonably-known conditions which diligent or even fine professional investors ought to grasp.  If you knew the situation with this company in advance, did you stand up for everyone in advance like Chanos did with Enron, warning and confronting them and those responsible for their regulation?  If not, the blame for intentional manipulation sits squarely on the manipulator and CAPS is probably as good a public rating scheme as any other.

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#7) On January 07, 2009 at 8:25 PM, devoish (99.07) wrote:

CAPS a failure?!? No. No way. No f'n way.

CAPS got me out of Biolase and Basinwater after only losing the buttons off my shirt. Thanks Seth.

CAPS stopped me from being fully invested during this 2008 crash. Thanks to Dwot, Floridabuilder, Seth, Escrooge, and so many others who helped me to understand housing prices that were making no sense to me.

CAPS helped me learn and I saw that commodities were going to collapse when so many were screaming that the growth would continue forever. Before they collapsed.

CAPS has taught me alot that I did not know before, tips about trading, when to buy, and mostly that I need help deciding what to buy.

CAPS is a raging success, even if it missed SAY.


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#8) On January 07, 2009 at 8:36 PM, TMFRosetint (99.27) wrote:

SAY is just one company, and as such really shouldn't be used as the sole indicator of the value of CAPS. It's an isolated case, as it were. If you want a more accurate view as to the value of CAPS, look at it as a whole and how its ratings compare to the market as a whole. I seem to recall this data is published from time to time, and as I recall it's pretty good.

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#9) On January 07, 2009 at 8:36 PM, jeffduby (20.57) wrote:

+1 for you. When I first started investing, I invested heavily in stocks rated 5 stars by the community. Those stocks are all down 50%. The stocks I decided to buy after I gave up on caps are down at most 10% some are still green. The key here is to do your own research.

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#10) On January 07, 2009 at 8:38 PM, TMFinept (88.45) wrote:

Did you get the call right because you believed there was fraud being committed or for some other entirely unrelated reason? Are you being honest with yourself about the reason for your thumbs down or did you just get lucky?

Congratulations on the absolute perfect underperform pick. Just make sure you don't confuse luck with skill/research/etc.

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#11) On January 07, 2009 at 8:50 PM, BravoBevo (99.97) wrote:

I agree with appleseedvalue that "doubts and good guesses are all that is left". 

I didn't pay much attention to SAY until last month when it announced that it intended to buy unrelated businesses on a non-arm's length basis from family members of SAY's chairman. Obviously, that intended self-dealing calls into question management's regard of its fiduciary duty.

When it became apparent that the reported acquisitions would not go through, I gave the company the benefit of the doubt and went "thumbs up" assuming that the drop in stock price overstated the effect if the proposed purchases were reversed.

Roughly a week later reports said the World Bank was banning SAY from representing the bank for an extended period of time. Then I realized that with seemingly unrelated problems surfacing in such a short span of time there might be more of the iceberg below the surface of the water compared to what was showing. And I said as much in my "pitch". So on the earliest opportunity, I closed out the "thumbs up".

In hindsight, I suppose I should have then gone "thumbs down" but no one knew there was massive fraud until it was announced today. But where there is smoke usually there is fire. It's possible that it could have taken more years to find the fire. And there were enough signs out there to at least steer clear of SAY.

I think part of the problem FreeMarket's really should be trying to address is that after a position is closed, the "pitch" is also closed out. As part of your due diligence, I recommend that you at least read though and consider the "pitch"s made on closed out positions.  Everything is date and time stamped for a reader to consider whether or not to consider the pitch relevant.

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#12) On January 07, 2009 at 8:56 PM, breaktrack (48.06) wrote:

When they are "cooking the books" with false info it is very hard to tell that. Since I didn't buy SAY (thankfully) I didn't follow it too closely. Did they have reputable auditors? Did they follow GAAP? There is much risk when dealing with the accounting methods of other countries.

There was one post on CAPS that metioned that SAY was run like a discriminating cast system and not a very good place to work.I almost pushed the "buy" many tiems on SAY but that one post kept coming back to me. I would advise reading as many of the posts as possible to see what they are saying and not looking at how many are for or against a stock. CAPS is good.


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