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portefeuille (99.44)

portefeuille

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February 22, 2010 – Comments (25)

just found this here (that post had no "recommendations" before I gave it one ...).

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Ending my Acorda pick now may ultimately have a negative impact on my CAPS score, due to the artifactual inflation of points in outperforms that were initiated at low prices. Intuitively this seems appropriate, but in fact it does not reflect the actual market. For example, if I now rate Acorda as underperform, pick it up as an outperform again if it drops to 28, and then ride it back up I will gain points in the short term but eventually become relatively negative once the price hits about 40. That's because my outperform points only reflect my most recent start price, not the original one. That's how I lost my score leader position in Progenix despite having three strong picks so far. However, I think it's better that I approach CAPS with my actual investment strategies rather than as an attempt to inflate a meaningless score which is only a weak reflection of the positive predictive value of a pick.

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I have felt somewhat guilty of doing this "score point inflation thing" for quite a while. While the "caps" game "accuracy" is rather ridiculous the score point part of the "ranking system" is not all that great either. Mainly for not being "annualised" at least to some extent. This makes "catching up" very hard and what is worse, keeps players from changing their calls.

An illustration. The stock price of a certain "caps" game "ratable" stock rises by 200% in a certain time period of length T, then drops by 50% in the following time period (of size T again) , then goes through this "cycle" "over and over again".

Player 1 makes an "outperform" call on the stock at the beginning of the first period and then "reverses" the call at the beginning of the following periods.

Player 2 makes an "outperform" call on the stock at the beginning of the first period and that's it.

Let's say the benchmark is constant (and again assuming no dividends that could make things more complicated).

For T=1 and p(0) = 1 you get this development of the scores p1(t) and p2(t) of players 1 and 2.

Now let's see what would happen if players 1 and 2 invests the famous $100. Let's ignore "commissions", taxes, ability to buy and sell any fraction of a stock, fees & interest for the "short sales" and all that.

Player 2 simply puts $100 into a long position in the stock and holds. Player 1 has two separate accounts, the "trading account" and the "cash account" puts $50 into a long position in the stock (in the trading account) and puts $50 into the cash account cash. At the beginning of period 2 (t = 1) he sells ($150, stock is "up" by 200%), puts 50% of the $100 gain into the cash account (so now he has $100 in that cash account) and "puts the remaining $100 into a short position" (i.e. sells short shares, receiving $100) in the stock. He covers that short position at the beginning of period 3 (t = 2) and again adds 50% of the gain (i.e. $25) to his cash account (now at $125) and puts the rest ($125) into a short position and so on. Maybe that was not as clear as it could have been. So player 1 is always 50% invested. In the odd/even periods he is invested in a long/short position in the stock. His separate cash account after each "50% of gains" cash transfer has other half of the money, the not invested part. So he is actually "playing" this pretty conservatively.

This shows the sum of the "account balances" after the "cash transfers" (both accounts have that balance at the time, so player 1 has twice that amount (all in cash) before making the next trade) for player 1 and the trading account balance for player 2.

(log is the natural logarithm.)

So as to the "caps" game score points player 2 (buy and hold) clearly "outperforms" player 1 "after a few cycles". As to "investing success" the situation is "different" ...

25 Comments – Post Your Own

#1) On February 22, 2010 at 11:32 AM, portefeuille (99.44) wrote:

There may be some errors in the above, it is just a quick and dirty draft ...

I think I will join zzlangerhans and ignore the "benefits of score point inflation". I already to some extent ignore the "caps" game "accuracy". In my list of calls I have already mostly ignored both ...

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#2) On February 22, 2010 at 11:34 AM, portefeuille (99.44) wrote:

... i.e. I prefer being player 1. Feel free to join us and go green!

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#3) On February 22, 2010 at 12:05 PM, creek138 (68.86) wrote:

I do this specifically with my short positions on the Direxion 3x's, where I short both the ERY and the ERX, because I know that theyre both going down over the long term (though less volatility and a bad entry point on the ERX has eaten alot of my earnings through margin interest charges). My question/concern is, I don't see this as very feasible in RL with typical stocks because you are essentially timing the market and one bad trade severely eats into player 1's earnings. Would you hold when you make a bad trade (say a loss of 30% in the stock) or would it be more prudent to cut your losses and trade again? The latter was my preferance when I was inexperienced (granted I've only been doing this 4 years now) and I ended up incurring some pretty step losses percentage-wise not to mention the capital erosion from commissions from all of the trades. So I only see this working if you're really good at timing the market , have knowledge of where the stock is going in the long term or you're really good at hedging your positions. What is it that me and alot of other traders are missing that makes the player 1 strategy work?

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#4) On February 22, 2010 at 12:52 PM, portefeuille (99.44) wrote:

What is it that me and alot of other traders are missing that makes the player 1 strategy work?

You are not missing anything. Somehow I never gave player 1 a name, I wanted to call him something like player perfect. I just wanted to demonstrate that player "lucky once" (p2, "blue") beats player perfect (p1, green) as to the "caps" game point score, which is obviously ridiculous. "Smoothed out" both players have an "exponential" money line and the exponent for green is larger than the one for blue.

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#5) On February 22, 2010 at 12:58 PM, anticitrade (99.66) wrote:

Excellent post Port.  Clearly accurately timing the market is difficult (if not impossible), which is why the scoring system on Motley Fool should reward investors who are able to do it. 

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#6) On February 22, 2010 at 1:04 PM, portefeuille (99.44) wrote:

So if you not very good at "trading" ("market timing") it might be a better idea to do the "buy and hold" thing. But the point of the "caps" game should be to get the player to try to, at any point in time, have the best "call" on a stock.

Or put differently. If you knew every tick of a stock for the next year it would still be pretty difficult to find the "caps" game point score optimising sequence of calls (actually impossible without some "serious" number crunching I should think ...). Which is just another of those little absurdities of the scoring system. oh well ...

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#7) On February 22, 2010 at 1:12 PM, anticitrade (99.66) wrote:

We all know that on some level Port is tempted to model the "optimising sequence of calls" scenario.....  I say resist the temptation and go to the park!  (jk)

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#8) On February 22, 2010 at 1:14 PM, portefeuille (99.44) wrote:

actually impossible without some "serious" number crunching I should think ...

in general. for some charts you might be able to finding the desired sequence by "looking at it".

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#9) On February 22, 2010 at 2:35 PM, creek138 (68.86) wrote:

"looking at it"

Didn't see you as a TA kinda guy. Kidding aside, yes when I see a .pk with $100 in the bank getting a $2B market cap, it's pretty easy to make the right call.

What worries me though is that if CAPS promoted day trades and market timing, then there would be many more fools out there concluding that since the top players are making money hand over fist as day traders than they should too. I think it would take away from the educational experience and inevitably end up costing those just starting in to lose more money that with the current system. Maybe I'm slippery sloping here, but I know that CAPS played a huge part in teaching me that wealth builds over time and the stock market typically isnt some "get rich quick" scheme.

I'm also similarly surprised that they allow us to trade the low volume BB stocks. It doesnt seem to educate (aside from learning about P&D) although sometimes the amusement factor (http://caps.fool.com/Pitch/JBII.OB/4490459/begin-the-unnecessarily-slow-m.aspx) can be pretty fun.

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#10) On February 22, 2010 at 2:56 PM, TMFCrocoStimpy (95.37) wrote:

Porte,

Nice illustration of what I will call the "cost basis vs new info" bias built into the scoring system for rising stocks.  In general, there is a bias in points towards maintaining a low cost basis and riding out volatility in a rising stock than in timing the movements of the volatility itself.  Depending on your intended use of the information this is not, as you have pointed out, ideal in its design, since each time you reset your cost basis you are effectively removing (from a $ management standpoint) dollars that would have stayed invested in that security had you not changed your call.  It does work in the opposite manner on underperforms - as your underperform is successful, its cost basis drops, so you can garner more points by updating your selection of an underperform (assuming that it continues to move downward as anticipated).  However, the "optimal" CAPS strategy can be quite elusive if a security is not moving with a high degree of consistency in a particular direction, and this to a degree is by design.

-Xander

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#11) On February 22, 2010 at 3:03 PM, portefeuille (99.44) wrote:

"looking at it"

I meant looking at the price chart going that one year into the future (see comment #6 above).

Didn't see you as a TA kinda guy.

I am not. I may however "by accident" have found one of the best descriptions of the current rally on 06/23/09 (see this post) ...

For the rest. Maybe a "kids, don't do this at home!" warning will do.

 

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#12) On February 22, 2010 at 3:28 PM, portefeuille (99.44) wrote:

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#13) On February 22, 2010 at 3:47 PM, portefeuille (99.44) wrote:

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#14) On February 22, 2010 at 3:50 PM, portefeuille (99.44) wrote:

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#15) On February 22, 2010 at 3:54 PM, TigerPack1 (99.06) wrote:

My investment decision goals are quite simple actually:  I try to buy undervalued companies and sectors and sell overvalued ones.  Seeing the reality of an investment situation (while ignoring conventional wisdom opinion) and preparing for changes in trend are the hard parts that must be mastered over many years of observation and experimentation.

I will leave the higher math arguments to you, anticitrade and the CAPS guys.

"Buying low and selling high" is the simplified version for success.

-TigerPack

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#16) On February 22, 2010 at 3:56 PM, portefeuille (99.44) wrote:

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#17) On February 22, 2010 at 3:59 PM, TigerPack1 (99.06) wrote:

I prefer Frank Sinatra and Celine Dion for listening pleasure.

-Tiger Out

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#18) On February 22, 2010 at 4:26 PM, creek138 (68.86) wrote:

Kids take too many risks and typically will look for instant gratification; I doubt a disclaimer would do much good. But that doesnt mean we should tailor a system to them, however, it would be nice to have a young investor forum. Thanks for the link, it is interesting.  I looked through some old Time magazines to see if I could find what capitulated the 1987 crash, but couldnt find any one catalyst. Just looks like investor fears and herd mentailty. If there was more to it, I'd like to know so that maybe we can predict if it will happen again this time around.

Do you know if anyone else has drawn out the same charts for other recessions? I've heard the late 70's bear market was similar to this one as well.

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#19) On February 23, 2010 at 5:49 AM, portefeuille (99.44) wrote:

the scores p1(t) and p2(t) of players 1 and 2.

the scores s1(t) and s2(t) of players 1 and 2.

 

if players 1 and 2 invests

if players 1 and 2 invest

 

the famous $100.

I guess it is usually $1 or $1000, but I was too lazy to change the screenshots I had already made and uploaded ...

 

and puts the rest ($125) into a short position and so on.

and puts the rest ($125) into a long position and so on.

 

has other

has the other

 

twice that amount

"twice that balance"

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#20) On February 23, 2010 at 6:06 AM, portefeuille (99.44) wrote:

the current rally (see this post).



enlarge


update.



enlarge

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#21) On February 23, 2010 at 6:07 AM, portefeuille (99.44) wrote:

see this post

see this post

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#22) On February 23, 2010 at 11:36 AM, TigerPack1 (99.06) wrote:

Only 7 out of Top 100 CAPS players are UP more than 100+ points today. Not much in terms of player sentiment or game setup has changed the last five weeks since the January peak in the stock market.

I would guess we will not hit bottom until 40 or 50 out of the Top 100 see strong point gains on weak down days for the market.

Apparently, we have a long ways to go on the down side, to change the leaderboard in favor of the bears.  When we get considerably more bears, and definitely more than a handful of outspoken bears on CAPS [With so many things going wrong right now for the stock market regarding its future pricing, I feel like I am the only one that can figure out what's going on regarding the nuttiness at the FED and in Congress currently.  Is anyone listening to the news on TV, or all the Top CAPS players sticking their heads in the sand like the government?], I will be more inclined to invest on the long side again.

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#23) On February 24, 2010 at 10:45 AM, sentinelbrit (89.40) wrote:

Interesting blog. I tend to be a buy and hold guy. I have a strong preference for buying out of favor stocks, perhaps too strong because I believe this works well in bull markets but not so well in bear markets. I have shied away from day trading because I think it is very difficult to do successfully on a consistent basis. However, I'm beginning to think the market could be range bound for the next few months (I expect the market to rise in the second half of the year), and in order to instill more interest in my portfolio and feel I have something to do (dangerous thinking) I am contemplating doing some short term trading. Just wondering - do you guys have any thoughts on how best to implement a trading stategy?

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#24) On February 25, 2010 at 11:22 AM, TigerPack1 (99.06) wrote:

This churning of picks for better accuracy has a solution.

I have mentioned this idea many time before to the CAPS people - they can use another statistic that they already keep to combat such a strategy.

CAPS should include "points per pick" as a third scoring category.  I would rather listen to someone that has 50% accuracy on 100 picks, but the "average" of those picks is +40% vs. the S&P 500!!!!

When measured against many of the leaders that have 80%+ accuracy, on thousands of picks earning +2% or +3% for the average points per pick, what use is that person???  If I must pay commissions and taxes on hundreds of trades, my relative performance would not be very good in my brokerage account, especially considering the effort that would be required.  After considering these facts, +2% or +3% would effectively create the same real world gains as a passive S&P 500 return.

If someone can create 10+ point gains, over and over, on thousands of picks, with high accuracy, such a person would be more useful to listen to, in my humble opinion.

Points per pick, is one of the most important indicators of smarts I review in other player scores.  If this idea were put into the total CAPS rank calculation, it would serve as a punishment for churning strategies only done to pump accuracy.

My recommended weighting would be 50% total points, 25% accuracy, 25% points per pick... If CAPS ran a beta test of this setup, I think they would also find that a better list of stock pickers would be generated for readers.

-TigerPack

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#25) On February 25, 2010 at 12:34 PM, portefeuille (99.44) wrote:

#24 see comment #12 here.

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