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CAPS Version II

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June 05, 2010 – Comments (10)

As a kind of journeyman investor I have found the CAPS competition  very valuable but I'm not sure for it's original stated intent. I don't spend any time looking at the community ratings of the stocks but the competition has forced me to follow a lot more stocks than I would follow normally and I think this has been very useful to me. I also enjoy following other players to see how different strategies play out but this is what has prompted this post. The clear best strategy to climbing to the very top of CAPS is what I have seen called harvesting. Maxing out your 200 picks and constantly closing out winners to bank points and score. I know others have complained about how valuable this is in the real world and I'm not here to beat that dead horse. It did get me to thinking about how you could improve CAPS so that player ranking became more meaningful.

The biggest problem I kept coming up with is how do you do this in a competition that's already been up and running for a few years now? Do you just start over and risk alienating everyone who has invested time and energy in the current system? If you do nothing do you risk alienating talented investors that may not like seeing gaming the system by harvesting being rewarded? I think I came up with the perfect happy medium. You leave the current system in place but add a new player ranking system on top of it that would utilize the top picks feature in the portfolios.

Here's my outline, leave the current player ranking system alone but add a new one that I'll CAPS II. Players will be required to add selections to CAPS II by utilizing the Top Picks feature in their regular CAPS portfolio. In other words your CAPS II portfolio is your top picks from your regular portfolio but there will be different rules in CAPS II:

1. You must have between a minimum of 25 and a maximum of 50 picks to be ranked in CAPS II.

 2. You are ranked based on points per pick (beating S&P) weighted to the number of picks you make.

3. Leveraged ETF's are either not eligible or limited to something like 5% or 10% of your total CAPS II picks.

 4. There will be some sort of limit on total number of picks per TTM to eliminate harvesting. I'm not sure what would be appropriate but maybe something like 200 which would be 4X the maximum active picks.

The idea is to create a new ranking system that rewards high score per pick but does it over enough picks and enough time to be meaningful. Right now CAPS tracks high pick score leaders but they all basically started portfolios at the bottom of the panicked market in March 2009 and only have a handful of picks that they are milking. This is the opposite extreme of harvesting. By utilizing the Top Picks feature of the current CAPS system and just creating a second ranking system you can implement this without effecting the current system and even utilize the current system as the starting pool of stocks for the more focused CAPS II. You could then just add CAPS II portfolios (current and ended) to the portfolio options.

One last suggestion, TMF should reward subs who come up with significant suggestions that get implemented with handsome monetary compensation :)

 Mike

10 Comments – Post Your Own

#1) On June 05, 2010 at 5:27 PM, portefeuille (99.65) wrote:

some related posts (also see this post).

March 30, 2009, Finding the true gurus in CAPS

October 19, 2007, Innovating Caps; a reflection in answer to a post of hall9999

October 20, 2007, Innovating Caps (2); a continuation of a reflection in response to comments by TMFBreakerDave

August 18, 2008, Innovating caps (3); macroeconomics and sector bets; accomodating the style.

September 06, 2008, innovating caps (4); making better use of blogs; accomodating macroeconomics & sector bets

September 08, 2008, Innovating caps (5); playertags and an ETF based ranking; harvesting information on macroeconomics and sector bets; i

August 23, 2009, Accomodating the specialist; innovating caps

August 28, 2009, Opening up a new continent in Caps; finally some justice for the stockpickers and a new challenge for the rest of us; innovating caps (7)

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#2) On June 05, 2010 at 5:39 PM, portefeuille (99.65) wrote:

This figure demonstrates quite nicely that no matter how hard we try to generate "alpha", the dominant effect comes from the chosen "beta".

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#3) On June 05, 2010 at 6:27 PM, TSIF (99.96) wrote:

Harvesting is useful for the accuracy portion that Porte speaks often about, but it is NOT the best way to make points, especially in this volitile market we are in now.  Good picks and patience would be more valuable.   Anyone who could have figured out the maniac of the market could have 10,000 points on relatively few picks and have great accuracy. Riding ETF's may have caused some players to rise rapidly, but in the cycles, they don't hold up.  Finding great picks, which is what CAPs is all about and holding them will net you many more points, less picks, and good accuracy. I've been no good at holding picks open either, but I can find many in my closed portfolio that I didn't close for accuracy, but thought they had gotten too high or too vulnerable.  Many would be worth hundreds of pionts if held open. 

Most of the players harvesting for accuracy end up with a large number of picks working against them for periods of time and few picks to play with as they hold the losing picks open.  

Knowing that companies with high debt were not going to be foreclosed on in this market would have you a top spot.  The leveage of getting a pick low and riding it up is much better than making ten picks for 5 points each.

The "problem" is that we lack patience in this volitile market.   You could take hindsight and make 100 picks from 15-20 months ago, all upthumbs and be at the top.  Can you do it without hindsight??   Many argue that those who downthumb have it easier.  I disagree with that as well. Upthumb calls have tremendeous upside. Downside will only net you 100 points even if the company goes bankrupt. Downside calls that scream higher due to Mr. Market can host you hundreds.

 Most of us are here to learn and have a good time, with no aspirations of top spot.  I think a several really good players, with time, and patience, will make it to the top spots without harvesting and without restructuring the game. The rule changes coming up on volume requirements will open things up considerably and cut down on the garbage chasing, althogh some of us enjoy that as well and learn from it.   Good luck. 

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#4) On June 05, 2010 at 10:53 PM, ozzfan1317 (82.25) wrote:

I think if your stock picks have the fundamentals then in a couple of years your score will take care of itself.

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#5) On June 06, 2010 at 12:24 PM, TSIF (99.96) wrote:

Ozzfan1317,  A very brief and direct way of what I was trying to say in my long winded convoluted post. Well said!

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#6) On June 06, 2010 at 1:40 PM, MKArch (99.73) wrote:

I agree that holding a reasonable number of well thought out fundamental picks over the long term will do well in the current CAPS system but the top 10 in CAPS are dominated by harvesters and their results in this system are so overwhelmingly successful I can't see a non harvester cracking the top 10 unless the harvesters all get bored and quit. Even then it will probably take years for a non harvester to get to something like 15K-30K points and 80%++ accuracy. I just think it's not that hard to find stocks due for a short term bounce or fall and the process of constantly cycling through these stocks builds up an accuracy and score that can't be screwed up after a certain point.

 As I mentioned in my original post I'm not here to whine about the system just add what I think is a constructive suggestion to modify CAPS in a way that will preserve what's already done but add an alternate scoring system that focuses on score per pick over enough picks and enough time to be meaningful. In my mind this will produce results from the very top ranked players that will be more useful to follow and allow some talented investors that are not willing to play the harvesting game to rise to the very top.

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#7) On June 07, 2010 at 9:03 PM, goldminingXpert (29.60) wrote:

You can lose 10,000 points that you've harvested over years in a few months. I have personal experience.

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#8) On June 08, 2010 at 12:03 AM, MKArch (99.73) wrote:

I think you might be a bit of a special circumstance goldminingXpert. Taking a quick look at your score and portfolio it looks like you are betting against the economy and all of your short positions have unlimited losses if you are wrong. A primarily long portfolio is only going to lose a max. of ~100 points on a bad pick.

 You also seem to be an ideologue sticking to your macro call on the economy. While accurate macro calls do seem to be a winning strategy as long as you make the right call, I think there are some more pragmatic harvesters that change as they see the market changing even if they don't fully believe the macro picture has changed.

The original harvester TMFEldrehad seems to be pretty pragmatic going fairly red before the recession and turning more bullish during the recession if I remember right. In any case I can see in certain circumstances harvesters losing lot's of points quickly but once you build up an accuracy in the 80%+++ range on a couple thousand or more picks it's hard to screw that up. That seems to be another shortcoming of the current system the way accuracy is weighted seems to reward it too much.

In any case I just think that harvesting is too well suited for the current format of CAPS to not dominate the highest ranks particulary for a pragmatic player with a talent for harvesting picks. maybe given enough time a player with a more focused portfolio will put together enough multi baggers to crack the top 10 but I think you also need the best harvesters getting bored and dropping out as well.

I'm not sure how to calculate all of the costs associated with a real life harvesting investing strategy but from what I understand it doesn't translate to superior performance. It just seems to me that having a system that rewards high scores per pick over enough picks and enough time to matter will produce top stock pickers that excel in the real world and will produce higher quality stock picks that will improve the community ratings as well.

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#9) On June 10, 2010 at 4:00 PM, SultanOfSwing (98.75) wrote:

By disqualifying Leveraged ETFs in your new system, you would be preventing a whole group of players who use technical analysis and market timing to excel in this game.  Myself included.  Part of the attraction of this game for me is the chance to match my market timing skills with thousands of other players, past present and future, with a myriad of investing styles.

I agree that "harvesting" and "milking" seem like unfair ways to game the contest.  But if you follow your style and still beat the harvesters and milkers at their own game, then another feather in your CAP, I'll say.

SoS

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#10) On June 12, 2010 at 10:13 AM, MKArch (99.73) wrote:

SoS,

I'm proposing leaving the existing ranking system alone so you would still be able to use your strategy there. The whole point of CAPS is to find people who are good at picking stocks that will go up in value. The current system works best for players who build up a fortress of points and accuracy cycling through stocks over and over again for thousands of picks. I don't know how to calculate all of the costs to this system in real life but from what I understand it doesn't translate to out performance.

I think most real life investors are looking for a limited number of stock ideas that have the potential for out sized gains. I'm just offering up an idea for an alternate CAPS ranking system that will bring the players who are good at picking stocks with big gains (or losses for shorts) over a significant amount of picks and a significant amount of time to the top of the ranks.

I'm limiting leveraged ETF's for a couple of reasons.  As a bit of a purist they aren't companies and I don't think they demonstrate stock picking skills as well as picking actual companies. The most successful way to play them in CAPS is shorting them which I'm not sure you can do in real life. IE: a short pick in FAZ at the same time as as a long pick in FAS will outperform FAS if the underlying stocks go in the right directions (financials outperform). I'm not sure how much practical application this has compared to how much it affects ranking in CAPS.

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