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Caps Says I'm Wrong

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October 24, 2008 – Comments (23)

I have taken critism for going 100% underperform, which was completely the correct move when your belief system is the market was seriously bubbled.

If I look at my one year performance compared to the S&P, well, I went to an average of about 4% on guaranteed investment certificates and government savings bonds, so I am up 4%.

If I compared to the S&P, well, one year ago it was at 1,552.76 and today it is at 876.77.  So, add 4% onto 1552.76 and you get 1614.87, divide it by 876.77, and I've out performed the market by 84%...

But I didn't make 84%, I just protected my capital.  I made 4%.

So, just how does caps score losers in a down market?

Well...

I am losing my google pick.  I said you'd lose money, and right now you'd be down 21% if you bought it when I underperformed it, but CAPS says I was wrong to advise against it.

I am losing my HSC pick.  I said you'd lose money and right now you'd be down 30%, but CAPS says I was wrong to advise against it.

I am losing on 63 out of 104 active picks that would have all lost you money...  

And here's the other, thing, people are actually "winning" on catching falling knives portfolios.

I stated my position very strongly in a comment on a blog in response to repeated critism that I couldn't pick an outperform if my life depended on it.  And, as I stated in the comment, "and with the system here you could also actually lose money and still be a winner."

I probably should have added, "a lot of money."

23 Comments – Post Your Own

#1) On October 24, 2008 at 6:30 PM, dwot (44.44) wrote:

Too much work to actually put this cartoon in, so a link instead.  It is hilarious.

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#2) On October 24, 2008 at 6:38 PM, columbia1 wrote:

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#3) On October 24, 2008 at 7:08 PM, kdakota630 (29.54) wrote:

I don't understand players on here who criticize better players, particularly ones ranked #1.

That would be like me complaining that Wayne Gretzky's slap shot wasn't hard enough, even though he has more goals than anyone else (and more assists and points), considered the greatest hockey player of all time, as well as infinitely more talented than myself.

Statues are erected to pay homage to those who have done something important, not to the people who criticized them.

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#4) On October 24, 2008 at 7:22 PM, GyroDynasty (98.76) wrote:

You're one heck of a stock picker...period!  There's nothing to be angry about.  If the players, I mean "haters," would just learn from you, they'd be in less of a jam.  I was onced ranked above 98, but now I see that my strategy doesn't work for this type of market.  I may recover in the long-term, but for now, I must heed the advice of the great dwot.  There's no shame in praising your ability to navigate safely in this dreadful financial environment. 

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#5) On October 24, 2008 at 7:45 PM, DemonDoug (65.96) wrote:

who the heck is criticizing you now, deb? There have been a few blogs out there that have complained that shorting dog .pk and .ob stocks is "gaming" the system, but I haven't seen anything for a while. And yes while antironchapmanjr has been a leader of that pack, there just isn't a whole lot of that criticism coming out lately. BTW that criticism wasn't just put on you but also on Bent, SpecBear, and even Eldrehad.

It's like when the 18-0 Patriots were saying "The media doesn't give us any respect" heading into the super bowl, when all the media was basically annointing them kings.  So yeah, stop with the false "everyone is against me" bs.

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#6) On October 24, 2008 at 8:03 PM, Ph1sh55 (28.43) wrote:

Of course CAPS says you're wrong because CAPS does not ask you to rate whether you think a stock will go down or up, only if you believe it will outperform or underperform. Therefore it's up to you to rate stocks under that guideline. :P

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#7) On October 24, 2008 at 8:06 PM, chk999 (99.97) wrote:

Your ranking is #1, that is the only thing that counts. You have played by the rules so it is an honest win. People who complain about winning within the rules are whiners.

There are other stock picking games with different rules and if people don't like the rules here they can go elsewhere.

Chris - still planning to beat you in the long run

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#8) On October 24, 2008 at 8:07 PM, devoish (98.31) wrote:

Debbie,

The last thing CAPS needs is for you to start telling us the story of neverending expansion at the height of a bubble, or neverending contraction as we go through the burst. You stick to your guns and to your picks.As far as I'm concerned, you are the smartest kid in the class.

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#9) On October 24, 2008 at 8:45 PM, abitare (34.56) wrote:

I agree, I am glad you wrote it. I really regret a Green thumb, that has positive points, but a negative percentage.

As a Top Fool, or All Star if you put a green thumb on a stock and it goes down, but not as much as the market. Are you really helping anyone? Some newbie might shadow you and buy the stock.

I would rather Red thumb a stock. Down is down in real life, does not matter if outperformed. 

That is why I created a portfolio on updown.com 

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#10) On October 24, 2008 at 9:13 PM, Tastylunch (29.28) wrote:

Dwot I'll tell you what matters in my book.... being right for the right reasons.

I think you have to looks at the the haters and see them for what many of them are, closed minded individuals.  I'm sure some of them are smart people but being intellectually inflexible is worse than being stupid. 

what matters is you did all your own work and came to your own conclusions. Objective Critical thinking seemsto be increasingly short supply these days.

Heck I bet most poeple forget about Dwotbuyback and that portfolio is an allstar now too.

If there are any players in this game who are above criticism for demeanour and talent I'd say it's you TDRH, CHK999 and GTRinvestor. You have the utmost respect from those of us who recognize honest intelligent work when we see it.

Heck your work has saved me tens of thousands of dollars in real life, if that's not true validation I don't know what is.

Oh and I completely agree about relative performance , it's a  not very useful metric. Relative perfomance doesn't put food on the table, absolute performance does.

Just my two cents.

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#11) On October 24, 2008 at 9:21 PM, dwot (44.44) wrote:

Tastylunch, you bring up my buyback portfolio, which sat below 20 for a long time.  I just set that one up, and then when I looked at if after the fact, I found it was already underperforming by 20% more then the decline on the S&P. I was like, "oh crap, it is going to be hard to have this one do well when it is already down 20 percent more then the market.  I should do a bit of price research before I just hit add, add, add..."  I am amazed when it had that much to overcome that it has turned around.

The fact that that portfolio is now winning when you consider my timing in setting it up...  Well, what a freaking disaster the buybacks have been for buy and hold investors.  This deregulation has been absolutely criminal against honest hard working individuals.

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#12) On October 24, 2008 at 9:34 PM, joeykid13 wrote:

Girl, Congrats.  You now, and have always been 100% right.  The DOW...4,250 by Christmas...and you...on top...LOL  KUDOS!  What exactly, must one do to become a Canadian citizen...LOL

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#13) On October 24, 2008 at 10:04 PM, Tastylunch (29.28) wrote:

Yeha no kidding,that's one heck of a comeback. Incidentally Hoadrius has really charged back up as well. I have to admit I was skeptical when you created it but I've been checking back on it periodically to see how it would pan out. It was/is a daring thesis and one that was obviuolsy correct in ight of recent events.

I think it has given strong evidence to dividends being the best way comapnies can spend excess cash for shareholders...

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#14) On October 24, 2008 at 11:32 PM, uclayoda87 (29.24) wrote:

Investing is hard enough, especially when the government seems to change the rules every week.  If you feel some of these companies are dying dogs then they are not going to beat the S&P 500 and they deserve an underperform rating.  Investing is more than buying a baby Microsoft or Apple, its also avoiding WM, LEH, etc.

In this environment, it just seems easier to find marginal companies than good companies that nobody already knows about.

When the market eventually turns around it will be fun again trying to pick the big winners, but for now I'll still be watching the morgue like dwot.

 

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#15) On October 24, 2008 at 11:58 PM, GS751 (27.42) wrote:

Playing the caps game is much different than trading in real life.. Much Much different.

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#16) On October 25, 2008 at 8:27 AM, TMFJake (58.88) wrote:

dwot, I wouldn't characterize CAPS as saying you're wrong.  The core question of CAPS is:  "Can you beat the market?" The question is relevant whether you are long or short.  If you have a market-beating pick, then that's intelligence we can all use in our portfolio--otherwise, I'd be better off going long or short on the SPY.  In CAPS, each pick, as we calculate it, is hedged against the market.

Fool On!

 

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#17) On October 25, 2008 at 10:14 AM, dwot (44.44) wrote:

I completely disagree TMFJake, in a down market CAPS is completely nonsense and outright dangerous to people's finances in terms of what suggests.  And beating the market also means not being in the market.

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#18) On October 25, 2008 at 3:37 PM, jgseattle (32.63) wrote:

I think what TMF was trying to say was if you hedge using a market index and then choose shocks inside the market index to overweight/buy the relative outperformance of the stock picks will be your profits.

This can be done with VERY complex trading but not something the average CAPs player will ever implement in their portfolio.

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#19) On October 25, 2008 at 6:59 PM, TMFJake (58.88) wrote:

dwot, as you know, your CAPS scorecard is not intended to be a model portfolio.  Instead, as I've said, CAPS implies that you should either be long or short the market (e.g. SPY) if you can't find stocks with excess alpha. In this sense, you can assume that in CAPS you hedge the market short for each outperform vote and hedge the market long for each underperform vote.

In this scenario, somebody who has an outperform pick in a down market that has declined less than the market is winning.  And someone who has an underperform pick that has declined less than the market (as in the examples you gave) is losing. 

CAPS isn't saying that wrong in calling HSC to decline in share price.  CAPS is saying that you were wrong to imply that it would underpform the market.  

 

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#20) On October 26, 2008 at 10:30 AM, btown819 (95.09) wrote:

I think everyone should be clear that as TMFJake has mentioned, "your CAPS scorecard is not intended to be a model portfolio." because 

"...in a down market CAPS is completely nonsense and outright dangerous to people's finances in terms of what suggests.  And beating the market also means not being in the market." -Dwot

CAPS measures your stock picking performance against the S&P 500 because it is a broad stock (equity) based index, and a relatively fair representation of the equity market.  CAPS does not measure against the performance of bonds (i.e. debt indexes), cash, or inflation.  This is because CAPS has multiple goals, one of which is to collect data on stock picks.  If players had no individual incentive (i.e. way to increase their CAPS score) to make an outperform call, then many players would stop picking outperform stocks in a brutal bear market (like now).  If this happened, it would seriously impair CAPS' ability to properly function as a relevant data treasure chest for the Motley Fool's business which deals with the equity market (i.e. stocks).  CAPS needs lots of data consistently in order to be effective over long periods of time (from a data analysis perspective).  Having significant decreases in player generated data during equity bear markets will not help assess the user community's collective opinion on individual stocks.  Using a scoring system that still rewards players for being able to achieve positive scores even in a down market, reduces data quality risk for CAPS, but simultaneously makes the CAPS portfolio less relevant to actual investors who use CAPS as a model for their own personal stock portfolios.

In real life, players aren't limited to only evaluating anticipated stock performance against the S&P500.  If the bond market or cash is expected to outperform the equity market for a period of time, then by all means an individual should evaluate that as part of their decision for the personal portfolio... yet don't expect your CAPS portfolio to reflect that.

Again, Dwot, nice find on this weakness/limitation of CAPS.  Virtually every system has it's strengths and weaknesses.  If you can't overcome a weakness, one of the next best things you can do is to be aware of it.     

 

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#21) On October 26, 2008 at 6:31 PM, dwot (44.44) wrote:

btown819, I knew that CAPS would look insane in terms of being a "winner" when the market turned.

I think Lordz says this best in his comment on his post, "the definition of Irony is being ranked 400 in caps all the while still losing his shirt and soon his pants and underwear."

It is assbackwards evaluation.  This is the one place that CAPS was very poorly designed.  The programming should have been to beat the market or zero, which ever is greater.  That would have truly been more useful for evaluation of stocks and done away with this nonsense that if you beat the market in a down turn you may have lost your shirt, pants and underwear, but it is ok because, like in war, you are the lessor loser.

I got out of some losers because of the design of caps.  That is just dumb.

 

 

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#22) On October 27, 2008 at 3:06 PM, JakilaTheHun (99.93) wrote:

I don't really see this a "flaw" of the CAPS system since it's explicitly designated that you are picking "outperform" or "underperform" the market.  The advantage of this is that it looks at one's records at analyzing stocks as opposed to one's record at timing the market.  While, there is something to be said for the latter, the former is of much greater use for a site primarily focused on the merits of individual stocks.  

Also, fwiw, there are tons of ways people could be mislead by blindly following the investment advice of others via CAPS (or any other investment wesbsite).  Right now, there are ultra-bearish portfolios that are scoring upwards of 99.  Many of these individuals may be excellent at picking stocks, but others might simply be perma-bears in a bearish environment.  What happens when we have a market upturn?  Some of the high-scorers might have wisely adjusted, but others might have stayed ultra-bearish, which would give investors a bad model. 

I'd also say that CAPS is biased towards short-sellers due to the accuracy component.  It's easier to pick a bunch of weak companies and have a high degree of accuracy, but it's less easy to do that while not getting destroyed by the winning companies since you can only gain 100% on a short, but you can lose an infinite amount.   Certainly, this factor is accounted for in the score component of CAPS, but it is still only counts as 2/3 of one's overall rating, whereas in real life, it would be 100% and accuracy would be irrelevant.

The accuracy component also punishes high-risk, high-reward long portfolios even when gains are large simply because accuracy might only be 40-50%. An investor like George Soros might perform poorly on CAPS because he seems to take significant gambles on extremely beaten down stocks, but all he has to do is be right on a few of them and he earns his returns. 

Why do I point this out?  Because every system has rules and every system has "flaws".  The best you can do is simply learn those rules and flaws and adjust accordingly. 

Though, it would be very interesting if TMF eventually allowed people to create actual portfolios on here, which could complement the CAPS portfolios. 

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#23) On October 27, 2008 at 9:59 PM, TheGarcipian (44.20) wrote:

Well said, TheHuney. Having a separate portfolio alongside the CAPS system would be a nice addition.

And lest we forget, CAPS is an on-going experiment to see if a collective community like ours can be predictive w.r.t. stock prices. Deb, I hear what you're saying, but as many others have already pointed out above & elsewhere, doing well (or poorly) in CAPS is not always indicative of how well (or poorly) you'd do in the real world. Congrats on staying at #1 though!

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