I'm really regretting ending my ISRG outperform pick
April 25, 2008
– Comments (9) |
RELATED TICKERS: ISRG
...based on valuation. But why, since it is lower than where I ended it? Good question. I will give you an example, and for the sake of simplicity and grasping the concept more readily, I will use the unrealistic premise of a perfectly flat S&P 500.
If I pick a stock that is at $100, and it goes to $200, I have gotten 100 points. If I do not end it and it goes to 300, I have gotten 200 points, even if it had earlier dropped from $200 to $180 while I kept my pick active.
However, if I end it at $200, locking in my first 100 points, and it drops to $180, and I then reload my pick, and then the stock goes to $300, my second gain is 67 points, for a total of 167 versus 200 if I had not correctly ascertained that it would drop from $200 to $180.
In CAPS it does not pay to know when a stock is going to drop from way above your cost basis to slightly less above your cost basis, because CAPS does not take into account that in real life you would have more money to put into your pick the second time (nor should it, necessarily). And the more it goes up in the future (assuming it does, which I don't think is that farfetched), the more your CAPS score will suffer from the higher cost basis (relative to never having ended it).
RSS Headlines
Fool UK