Does CAPS score correlate with performance?
I've been wondering if CAPS score (number of stars) is as predictive of performance as TMF likes to claim. I looked at the stock advisor recommendations since April 2007 and sorted them by CAPS rating at the time of the recommendation.
5*: average return -5%, range -70% to +73% (total of 22)
4*: average return -9%, range -41% to +18% (total of 12)
3 and 2*: average return -1%, range -38% to +123 % (total of 10)
For comparison, S&P average return -11%, range -36% to +31%
Hmmm, looks like 2 and 3 star stocks outperformed 4 and 5 star stocks, but it's probably mostly due to that one outlier (+123%). So, small number statistics are an issue. But, how many stocks would I want to own? Probably not more than this.
And look at the range of returns, e.g., -70% to +73% for the 5* stocks. That's pretty scary. If I bought every 5* stock they recommended when they recommended it, I would be 6% ahead of the S&P. But, if I missed one or two (e.g., the +73% one), my returns could be much worse (or much better). That seems pretty random.
I guess I was hoping for some way to filter the stock advisor recommendations since I can't buy everything they recommend (too many stocks), but CAPS stars is not going to help. Maybe I will just go buy a mutual fund and stop spending time on this.