TMFKopp (98.47)

From Yay to Yuck

August 23, 2007 – Comments (5)

I've been a bit lax about posting the last two months partially because I was in the process of getting married and moving. I've also been a bit gun-shy because my pre-wedding CAPS rating in the 90s has quickly fallen to a dismal hide-your-face, propellar-cap sub-20.

Major time constraints aside, a big contributor to my solid underperformance was my effort to "play the CAPS game." For those that don't follow the angry discussion threads about it, that means take small gains on stocks and banking accuracy as well as trying to find some dead-beat stocks to slap that red thumb on. 

Unfortunately, I found out that I'm not so great at that. It obviously worked for a while since I found myself in the top 10% of CAPS, but when I took a break from daily CAPS watching to prepare for wedding/move... well, crash and burn ensued.

Now as far as the "game" of CAPS goes, I know there is plenty of contention in the upper ranks of CAPS players over whether there should be any respect given to the players that clawed their way to the top by using primarily underperform calls. I mostly aim to stay out of the middle of that, but I do think it will take a lot more work for those guys over time to maintain their ranking than it will for players with a lot of thumbs ups to start overtaking them.

Here's an simple example to think about. Say you give a thumb up on a stock that is at $100/share. The stock has a great year and rises 50%. A further 10% gain on that stock adds 15 points to your CAPS score (setting aside changes in S&P).

Meanwhile, say you put a thumbs down on stock at $100/share and it falls 50%. If that stock falls another 10% that change is only going to add 5 points to your score (again setting aside S&P changes).

Over time, this should play out on an even greater scale for players that hold onto successful outperform picks. If that $100 outperform becomes a 5-bagger, a further 10% gain will add an impressive 50 points to your score. However, if the $100 underperform goes bankrupt... well, asdie from the points you'll get from a rising market, you need to go find a new target.

In other words, it will take a lot of work and attention from the short-term crowd to maintain their position. Though banking accuracy points certainly helps, they'll need to continue to be very accurate over a bunch of picks. Many of this group will likely get tired of the amount of time and attention that they have to give to their CAPS portfolio and end up saying, "well, I proved [something or other] and so I'm done with this." No doubt there will be some that stick with it and continue to do well... I'd definitely tip my hat to those that do.

The other group, I guess we can call them long-term buy and hold (LTBH), won't necessarily have to put a whole lot of time and effort into their CAPS portfolio. After a while their CAPS picks will start working for them -- so to speak. Many quality stocks that ended up in the red in the short term will find their way back into the black and bolster accuracy. The compounding of the points from highly outperforming picks will start to show in earnest too and point scores for the LTBH crowd will also climb.

Of course, there are plenty of players in between that have a combination of short-term out-and-underperform picks and long term picks, and they can benefit from the best of both worlds. 

My post has ended up far more rambling than I had expected so I'll try to wrap it up here. The bottom line is that there really are a lot of ways to outperform the market. There certainly is some merit to the argument against underperforming OTC stocks that you couldn't short in real life, but in general I can't argue with the success that the highly-active short term crowd has had. In "real life" traders can make money very successfully -- but that is a very intense, very grinding line of work that burns out many practitioners at a relatively early age. True investing on the other hand... well, have you seen the smile lately on the face of 76-year-old Warren Buffett?

And to conclude where I sort-of started this off -- with my abysmal score -- a friend who's also on CAPS emailed me the other day more or less asking whether I was going to try to revive my score or weasel out and start up a new account. Besides the fact that the gents at TMF would definitely not allow me to reset the score of my TMFKopp name, rather than seeing the poor score as a failure, I see it as a bit more of a challenge to pull myself back out of the red.

Will you be seeing me on the leader board any time soon? Probably not, but I'm certainly shooting to have a real cap again soon, maybe even with a bit of color in it.

-Kopp