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prose976 (< 20)

Counter-intuitive Shorts (not the kind you swim in)

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July 06, 2007 – Comments (7)

My blog entries are written with more than just entertainment in mind...I write them to get your gray matter moving and to shake myself and everyone else out of this euphoric haze that playing games puts us in.

You know, the Romans would hold games for months on end to distract and satiate the masses.  Of course, while the masses were busy enjoying the games, the wise and powerful were selling them concessions, memorabilia, housing, nightlife, etc.

How is this related to the title of this blog entry?  I just want to shake it up a little for anyone who takes investing seriously.  As I have stated before, CAPS has its redeeming qualities, but it is also a big distraction (very entertaining and exciting) for all of us who use it...kind of like the Roman games.

One of your option here at CAPS is a choice to "short" stocks, essentially betting they will underperform the S&P.  I ask, "What is the purpose for this except to entertain and tickle your "I knew it! bone."  Yes, a person might feel great to be #1 (or close to it) here at CAPS, but the fact is, in real life you just can't invest like most of the players here, because shorting does not work in the real investing world like it does in this game.  You see here, a person can bet against a stock for an indefinite period of time, and as long as that stock loses to the S&P, your score will reflect that in a positive way.  If you try to short stocks in the real investing world, you usually have margin requirement that may be hard to meet, the proceeds from the sell are held aside, plus most brokerages also require a certain percentage of the value of the stock to be held aside.  You can lose seriously if you do not have a high level of sophistication and know-how.  You can be put into a call if the stock rises too much at which point, you would either need to deposit more money, or the brokerages margin group will sell some of your other stocks positions to cover the call.

CAPS is NOT the venue for using or learning about shorting or the benefits of betting against stocks to gain score and postion here at CAPS.  Regardless, CAPS rewards players for using a sort of super-liberal shorting style here, where shorting is a pure fantasy without any of the real-world impact.  The conundrum with CAPS is that it teaches many bad habits and ideas while also providing us with access to very useful information and somewhat educational material.

To drive my point home, I can sum it all up with one sentence:

I AM NOT AWARE OF A SINGLE MOTLEY FOOL SERVICE WHICH USES OR TEACHES SHORTING.

So why is shorting instrumental for attaining ratings and scores here at CAPS?

Fool On!

Philip

7 Comments – Post Your Own

#1) On July 06, 2007 at 4:41 PM, StockSpreadsheet (71.43) wrote:

Philip,

I agree with all of your above statements regarding shorting and how unrealistic shorting is in CAPS. I will disagree with you however when you say shorting is "instrumental for attaining ratings and scores here at CAPS". As I like to point out, I am a Top 200 player that has never once shorted a stock in CAPS. In my time in CAPS, I have come across stocks that I think beg to be shorted. However, since I would never short in real life, (due to all the reasons you stated above), I don't short in CAPS either. As you said, I think it would just teach me bad habits. So I am one example that you can do well in CAPS without doing unrealistic shorting, and I am sure there are a few others out there as well.

Good post though. Maybe you can keep a few neophytes from going down a very dangerous path with unrealistic expectations and non-real-world experiences. Keep up the good work. May all your stocks be winners.

Craig

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#2) On July 06, 2007 at 6:39 PM, prose976 (< 20) wrote:

Craig,

Thanks for the input.  DRP451 is my brother-in-law - he's in the 99+ percentile and doesn't short either.

I believe there are many who don't use a shorting strategy who are in the 99th, but I also know many are there using shorts.  This is what I was referring to.

I just believe that shorting in this game is a mistake and that it is misleading that CAPS all-stars are using this strategy to elevate their positions.

Fool on!  Have a great weekend.

Philip

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#3) On July 06, 2007 at 8:52 PM, rd80 (98.19) wrote:

Philip,

I don't know how you would make TMF's rating algorithm work without having some kind of underperform, sell or don't buy rating.

I agree it let's us play with a strategy most individual investor's don't and shouldn't use.  However, it is useful in conveying group consensus on stocks that people might be considering for their portfolios.  For example, if you were thinking about buying  XYZ corp, you might reconsider, or at least do more research, if you saw that it carried underperforms from players you respected.

And, I'll freely admit to using underperforms even though I don't short stocks.  Nearly half my CAPS points came from red thumbing New Century -  twice. 

Perhaps CAPS should count short points differently, have a 'long only' category or award some kind of bonus that recognizes it's more challenging to play without shorting.

I concur with your point that CAPS doesn't simulate real life investing and players should recognize that.  However, also recognize that system users range from people who are using it to model and improve their investing skill to people who play it as a game and those of us that do both.

Fool on and a great weekend back at ya'!

RD 

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#4) On July 06, 2007 at 8:54 PM, MakeItSeven (32.44) wrote:

Firstly, CAPS allows stocks to be marked as 'Underperform' so the stocks can be rated.  It's similar to the basic analyst's recommendations of Buy, Hold, or Sell.   Taking the 'Underperform' rating away, then if a stock has only 5 Outperforms rating, you won't know whether it's because few people look at it or because most people think it's a bad stock.  It's like an analyst rating system where the only recommendation option is Buy (otherwise just keep quiet and don't say anything).  It won't be helpful at all.

Secondly, It is not about CAPS score, but about providing rating inputs.  A few people might take CAPS score seriously and think this is a game that they're trying to win.  The description of CAPS says otherwise: "Investors helping investors beat the market".  In other words, it's a system using collective wisdom to help each others.  The CAPS points and the rankings are only secondary to the ratings, to provide the level of finesse to determine whose opinions should carry more weight.  An analyst who can foresee a trouble stock is just as helpful as one who can pick out a good stock.

Are there people who abuse the Underperform ratings to gain better score ?  Maybe, maybe not.  The bottom third of my CAPS picks has a lot more 'Underperform' picks than 'Outperform' ones though.

I suppose if someone goes "dumpster diving" (as another fool described a few days ago) then he might boost up his score if he's lucky and that's  anti-reality also since brokerages won't allow you to short stocks under $5.  But, as far as ratings go, the 'Underperform' ratings are still legitimate as a warning for novices who might think that those stocks are good deals since they're cheap.

If there are improvements to be made then I suggest these two:

1) Do not allow any ratings on BB or PinkSheet stocks.  It's also fair for TMF to have a general policy of not recommending any of unlisted stocks one way or another.

2) Curtail the Accuracy point harverting.   I've only been here for a short time but I've run into people with over 70% accuracy mostly thanks to the 5+% stock harvesting scheme while less than a quarter of the stocks in their current portfolios have positive CAPS points.  While people doing that might think it's a smart way to boost their rankings in the "game", it actually distorts the CAPS ranking and decreases its usefulness.

As for the real life world, I made much more money last year (in my 160-page schedule D filing) shorting stocks than going long.  None of the higher margin requirement you described is correct.  In fact, when shorting a stock you earn interest on the sale proceed and the margin requirement whereas you would have to pay the brokerage interest if you buy a stock on margin.

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#5) On July 06, 2007 at 9:18 PM, rd80 (98.19) wrote:

This discussion reminded me of an outfit called Covester profiled in Barron's a few weeks back. It sounds similar to CAPS, but your picks get verified against your real portfolio and they plan on setting it up so users subscribe to their favorites who then get a share of the fees. 

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#6) On July 07, 2007 at 1:00 AM, fOOLSONPARADE (95.06) wrote:

The only place I have seen MF actually adress shorting outside of CAPS is in one of the books the Gardner brothers put out.  I believe it was #2 in a series.  Actually, that was where I first learned of shorting. It makes sense that if you can accurately pick an undervalued company with a niche and maybe a moat, etc you should be able to pick one that shows the opposite qualities.  Personally I wish they had a subscription service for shorting I would sign up.

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#7) On July 07, 2007 at 4:50 PM, prose976 (< 20) wrote:

Excellent points and kudos to all commentors here on my blog.  This is what CAPS is all about - input from many different perspectives, providing food for thought for conscientious investors and students of investing, all of us benefiting from knowledge and experience within the CAPS Universe.

Have a great weekend everyone.  Fool On!

Philip

 

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