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How to build a winning CAPS portfolio

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April 20, 2009 – Comments (4)

Since you are only allowed to make 200 picks in CAPS it is important to think of how to best make use of those picks.  There are two main approaches that can be used to filling out your portfolio:

MICRO/BOTTOM UP APPROACH - This involves examining individual stocks to determine if they have been priced inneficiently by the stock market.  This strategy basically involves researching companies and comparing their market price to their intrinsic valuation.  Tough to do and very time consuming. 

# of picks - 10 to 20 picks 

10 to 20 picks is being generous.  More likely 5 to 10 is more fair.  see:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364827  (top 5 holdings tend to outperform rest of holdings tend to perform equally to the market)

MACRO/TOP DOWN APPROACH - Identify a sector that will out/underperform.  Research various industries and determine which have the best/worst prospects.  Again, tough to do not as time consuming on a per-pick basis since once you come up with an investment thesis you can make several picks (Shorting homebuilders in 2007, shorting financials in 2008, going long and then short commodities in 2008 are all examples of the macro/top down approach) 

 # of picks - 0 to 150 picks

Since you won't always have an investment thesis on which sector will out/underperform sometimes you will have zero macropicks sometimes you will have 100+ macro picks

What to do with unused picks -  Since at anyone time you will have only 10 to 20 bottom up picks open and may or may not have a macro investment thesis, there will be alot of times when you will not be using all 200 of your available picks.  Leaving them unused is an inneficient idea since there are two ways to fill out your portfolio

Short OTCBB  stocks that have been identified as scams (look to citronresearch, everyday investor, and TMFsmashy for some good picks.

Short leveraged ETF's, Because of the way the daily returns compound this is guaranteed points and accuracy on everypick over a multiple month time frame

 

To sum things up for the tl;dr crowd:

pick 10-20 companies to outperform/underperform

look for macro investment thesis

fill out any unused picks with OTCBB scam stocks (short) + Leveraged ETF's (short)

Happy fooling.

4 Comments – Post Your Own

#1) On April 20, 2009 at 6:03 PM, mustbepatient (29.58) wrote:

As you force yourself to make more picks, your accuracy will go down. I don't want to make a pick unless I am 80% sure that I will be right, or it will not have a positive expected value on my CAPS ranking.

Also, mathematically speaking, most people will not correctly determine sector trends except for at brief periods near the ends of trends, so if they dominate their portfolio with sector bets, they will be likely to destroy their CAPS portfolio.

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#2) On April 20, 2009 at 6:08 PM, zzlangerhans (99.84) wrote:

Thanks! I built my winning CAPS portfolio! Now what should I do?

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#3) On April 20, 2009 at 6:40 PM, Varchild2008 (84.38) wrote:

Crap!  This stuff's confusing.  I thought randomly outperforming stuff was how to play this game... Now it's like ya have to THINK before you thumb :-(

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#4) On April 20, 2009 at 6:50 PM, MikeMark (29.54) wrote:

Oww, that's another new brain wrinkle!

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