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CAPS vs. Portfolio Simulation

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December 13, 2006 – Comments (4)

There has been a lot of very good, thoughtful discussion about pick the size of the CAPS pick lists of some of the most highly rated CAPS players both on the CAPS boards and in blogs. While my opinions on this subject are well-known to anyone who has followed these boards, I thought I’d capture my thoughts again in this blog.

Many Fools lament that a player who picks a small handful of really good stocks, one who is a fantastic buy and hold investor, doesn’t have the same chance at making Top Fool as someone who is far more prolific when it comes to making picks.

While this may well be true (and may not be – time will tell us for certain), I think it misses the overall purpose behind CAPS.

CAPS wasn’t designed as a portfolio management game. The central question CAPS is intended to answer isn’t who is the best investor. The central question is, as I understand it, which are the best stocks? CAPS seeks to answer this question by harnessing the community intelligence of thousands (soon to be tens of thousands) of Fools by recording and consolidating the opinions of the players.

With that overarching goal in mind, how then does one devise a system that best accomplishes this?

In terms of building community intelligence, my personal belief is the more data, the more opinions that CAPS captures, the better the community intelligence is going to be. CAPS, therefore, needs to be structured in such a way as to encourage players to make picks they have an opinion on – and to make a pick on *any* stock they have an opinion on.

I certainly don’t manage my personal investing portfolio the way I manage my CAPS pick list – and that’s the point – and in my opinion is part of the genius of CAPS. While the ‘game’ aspect changes a bit for pick lists once they reach 100 picks, up until that point the game encourages players to make calls that they think are even only very slightly more likely to be correct than they are incorrect. This adds to the community intelligence database, and furthers the achievement of CAPS’ primary goal.

A portfolio simulation game, on the other hand, rewards extreme selectivity and concentration. While this, in some ways, might be better suited for finding out who is the best investor (though I have my strong doubts along these lines – perhaps the subject of yet a different blog post someday), it doesn’t encourage the breadth of opinion to the same extent the current scoring methodology does – and therefore in my opinion, would fall short.

If CAPS were a portfolio simulation game, would we have star ratings on over 3,000 stocks, and climbing? If CAPS were a portfolio simulation game, would we get to know Seth Jayson’s opinion, Bill Mann’s opinion, David Gardner’s opinion, as well as so many other brilliant Fools, on not just a few stocks, but scores if not hundreds?

I, for one, don’t think so – and I, for one, am glad I have more opinions, not fewer, from these extremely bright Fools to turn to and learn from.

4 Comments – Post Your Own

#1) On December 13, 2006 at 8:13 PM, mikeinmadrid (91.78) wrote:

Eldrehad said "Many Fools lament that a player who picks a small handful of really good stocks, one who is a fantastic buy and hold investor, doesn’t have the same chance at making Top Fool as someone who is far more prolific when it comes to making picks."

But isn't there some filter to find the highest scores for the smallest number of picks?

I must admit I'm still searching for the utility in CAPS. However I think it will become apparent over time as long as there are enough players and the players (on average) take the game seriously.

Cheers

Mike

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#2) On December 14, 2006 at 6:13 AM, VictorianJester (93.15) wrote:

Couldn't agree more on the giving opions on ANY stock idea:

" The central question CAPS is intended to answer isn’t who is the best investor. The central question is, as I understand it, which are the best stocks?

... .... CAPS, therefore, needs to be structured in such a way as to encourage players to make picks they have an opinion on – and to make a pick on *any* stock they have an opinion on. "

- However, due to the score issue, many folks won't pick a stock to say, to outperform if they only think it will marginally do so or if they have minimal doubts on the outcome ....

I've actually thought about using CAPS to mirror my REAL portfolio in a WEIGTHTED manner give people a different kind of information. I wish there was another caps where folks could share their real portfolio weightings (by percentages and not absolute values of course), or that caps would at least allow separate stats for those of us who are competitive (ie including dividends, length held, total number of picks, and other stats that were mentioned by many players).

Just a thought, and I realize it could involve alot of work for TMF team to develop new tracking systems.

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#3) On December 14, 2006 at 9:42 AM, TMFEldrehad (99.99) wrote:

I know different ways of slicing and dicing the data are certainly something the CAPS team has been thinking about as possible future enhancements (though how these rate relative to other priorities I don't know).

That said, to comment on VictorianJester's point:

"- However, due to the score issue, many folks won't pick a stock to say, to outperform if they only think it will marginally do so or if they have minimal doubts on the outcome .... "

Under the current CAPS scoring methodology, that would be a mistake. Again, it changes a little once a player hits an overall pick list of 100 stocks, but up until that point, even if a player thinks a call has a 51% probability of being correct and a 49% probability of being incorrect, the expected value to one's player rating as a result of making this pick will be positive.

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#4) On January 08, 2009 at 10:15 AM, OhioVET (< 20) wrote:

CAPS experts/Fool folks,

Regarding CAPS, in which I am a modest (and largely unsuccessful) participant, I am wondering:  Isn't there a basic circularity to the process? I mean, as an MF Pro and Million investor, I rely on the MF to identify which stocks to buy.  Then I buy them.  And because I buy them, I give them a high CAPS rating.  And then MF ariticles cite CAPS rating of what the communtiy "thinks" about the stock.  Isn't this a self-reinforcing exercise?  And if that is an actual phenomenon, how does the CAPS methodology adjust for any bias?

Just curious,

Thanks,

JMillerVA

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