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I'm really regretting ending my ISRG outperform pick

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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).

9 Comments – Post Your Own

#1) On April 25, 2008 at 12:51 PM, FleaBagger (28.88) wrote:

I forgot to mention: this hypothetical is valid even though the S&P won't really be flat, because we're talking about stocks whose price changes dwarf those of the S&P over any time period.

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#2) On April 25, 2008 at 1:13 PM, AnomaLee (28.69) wrote:

True & maybe I should stop trying to trade stocks on CAPs then... I don't know if I'd consider that a flaw... but nothing would be as perfect as making money 

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#3) On April 25, 2008 at 2:02 PM, TDRH (99.67) wrote:

A bull can make money in the market, a bear can make money in the market, but a hog never makes money.    Never regret cashing in a winner.     One thing you cannot do in caps, which I try to do in real life (not very often)  is to take my money off the table and let the house's ride.   Your still in the game.  People would argue against this, but markets change, blindly letting it ride (unless there is solid, dependable dividend) is a thing of the past.     

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#4) On April 25, 2008 at 2:25 PM, FleaBagger (28.88) wrote:

TDRH -

You're right about cashing in half your doubles or a third of your triples or whatever in real life, but I was talking about CAPS strategy for winners that you think are going to be going way up long-term, but down in the near term.

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#5) On April 25, 2008 at 2:30 PM, FleaBagger (28.88) wrote:

Update: I went back and looked, and it turns out my CAPS cost basis wasn't as good as I remember, nor was my ending price as modest as I remember. I rode it from 225 to 344, and now I'm back in at about $275-$280. That's not bad at all.

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#6) On April 25, 2008 at 3:23 PM, TMFHelical (98.97) wrote:

Fleabagger,

I went through this same consideration a couple of months back with Cepheid.  I was right to end when I did and have since reupped a bullish position, but yeah - long term it is the wrong move from a score consideration.

I suggested on the discussion board that I be able to put a 'hold' on the stock - where I don't really end the pick, but can start it again where I left off. 

In a way, I think this is an argument for the importance of accuracy.  Shorting on valuation or simply ending a bullish call are essential to the stock ratings - so the pitfalls of doing so long term do need to be minimized in some way.

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#7) On April 25, 2008 at 3:47 PM, FleaBagger (28.88) wrote:

Zz -

I'm glad to hear from you again. You're right, and I think if we put in enough work to get all those little details worked out, we could make that "CAPS Five Star" hedge fund we've all (more or less) secretly wanted to make.  

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#8) On April 26, 2008 at 10:44 AM, TMFHelical (98.97) wrote:

Fleabagger,

Off topic, but I replied to you in Bent's blog as well.

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I lost money on MIDD shortly after they took on debt and bought out the original owner group.  I sold just prior to the quarterly earnings at the end of April 2005, after only owning a few months.  Bought at ~54, sold at ~43.  Of course the had a great quarter and went back up to around my buy price shortly after I sold.  Oh well, my wife had owned it and done well.

As for Avatars - Mine changed too.  TMFJake hooked me up.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=19292&t=01004587832930584449

Zz

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#9) On April 28, 2008 at 12:03 AM, FleaBagger (28.88) wrote:

Zz -

I just posted a request on Jake's latest blog post, only to realize that his next-to-last blog post had everything I needed to know. I felt like such a chump. Thanks for the info! Better luck next time you buy a great company. I sold MA at $105, so that's sort of similar, I guess.

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