TMFBabo (100.00)

Random Thoughts

July 17, 2010 – Comments (17) | RELATED TICKERS: RA , N , DOM

What a CAPS Pick Means to Me

I make CAPS picks for many different reasons.  However, there is one thing every pick of mine has in common: I believe I can close the pick later for positive points.  In the end, CAPS to me is a competition of sorts with a certain rating system (2/3 score, 1/3 accuracy).  I would not make a pick unless I thought I could end it for points.  That is the ONLY reason to start a pick. 

In an ideal world, I would research each and every pick for hours.  However, that is not the case.  My most researched pick is PG at 10+ hours.  That is my favorite company.  I have even designated PG as one of my two top picks.  I do not believe it is the most undervalued company out there (far from it), but I believe it has a very high chance of outperforming compared to the other companies I've rated.  I'm not willing to stick my neck out and designate something a top pick unless I have a high degree of confidence it will outperform, even if only by a small margin.

I may have researched PG and a few others for many hours, but that is usually not the case.  Sometimes, I look at a company's financial statements for just 3 minutes and it immediately reeks of value or of bloatedness.  I have made green thumbs and even real-life purchases based on fewer than five minutes of research.  Since I usually carry 180-200 picks, it's safe to say that some of my picks were only researched for 3 minutes (that is not an exaggeration - I mean 3 minutes).

Even worse, in times of temporary and unwarranted bullishness or bearishness, I've made large baskets of mediocre picks.  I've improved my quality of pick over time, but I'm still prone to making very bad picks here and there.  Some of them will be catastrophic failures, too. 

An interesting observation is that many CAPS portfolios have the opposite of survivorship bias going on.  Many people carry loads of bad picks, hoping they might close them for positive points one day.  Many of my best picks were closed a long time ago.  One could look at my open picks and think I'm a total scrub, but my open picks from the past are most likely my worst picks or simply the picks that never panned out.

Following the Leader

Now that you know that it's impossible to research 200 picks thoroughly, I believe it's the perfect time to talk about the problems with the "follow the leader" strategy. 

Many people here do what their favorites do.  I've noticed that when I pick a stock, a bunch of members follow me into the pick.  Why? Simply because I have a decent number of groupies and they like to pick what I pick.  Based on my observations, I'd say that UltraLong has the largest "follow the leader" effect.  When he picks something, you have a massive number of picks that immediately follow his pick. 

Based on what I've just told you, you should now be a little more skeptical about the "follow the leader" strategy.  Just because a top fool chose something does not mean that pick is going to outperform greatly.  You could of course point out that UltraLong includes pitches with his picks, but I would bet that most of his pitches take well under an hour, at least the ones where he only comments on things that can be learned by looking at the financial statements.

I can honestly tell you that I follow the strategy at times too.  I've stolen picks from many top fools in the past.  However, I can honestly say I'm not sure it's been worth it at times.  I've dogpiled on certain stocks because I saw many fools I respected rating a stock a certain way.  I've often lost my shirt through blind following in that fashion.  My best performing picks are often my own, because I know exactly why I'm picking the stock.  When you follow, you have no idea why that person is rating the stock.

Following should be done with great care.  Identify what you like about each member you follow and try to see that player's strengths.  For example, I follow throwerw for Chinese stocks, JakilaTheHun because I really like his valuation style, TMFDeej (a recent addition) because he identifies interesting large cap opportunities, and more.  I no longer blindly follow anyone or even a pack of bulls/bears into any stock because it's worked out poorly for me in the past.

Our Current Market

The economy sucks, our government has too much debt, and I believe housing is still vulnerable. (aren't there more loans resetting in 2011/2012??)  Looking at just the stock market, I believe the market's slightly overvalued.  I like Shiller's CAPE (Cyclically Adjusted PE) for valuing the market.  I would include the current CAPE, but I couldn't find it in my 30 seconds of googling.  It simply averages 10 years of earnings instead of using TTM earnings to smooth out the cyclicality. 

I don't see too many reasons to be bullish, but I do see many reasons to be bearish.  Even so, I'm still buying/rollercoastering even now.  I believe quality large caps that maintain or increase earnings while paying dividends are particularly attractive right now.  The volatility has also produced short-term opportunities.  I happily scooped up EXC at $38 (I think it should at least be in the $40s) and I scooped up some shippers (GNK/DSX/PRGN) when it was announced that the BDI had gone through a 31 day slump.

Short-term opportunities notwithstanding, I believe that a great strategy right now would be to dollar cost average into quality dividend payers such as PG.  If dividend growth hasn't struck you as a solid strategy for some odd reason, there are decent yields among MLPs, utilities, pharma, tobacco, telecom, or whatever.  I prefer dividend growth myself because I believe dividend + dividend/earnings growth will provide higher total returns in the end.  Dividend aristocrats who increase dividends over long periods of time while maintaining reasonable payout ratios are increasing earnings (and thus, company value) at nice clips (not to mention paying dividends). 

Future Top Fool

I noticed during the last week that TMFStockSpam broke the top 100 for a while.  Every pick of his is made because somebody received pump and dump spam materials in the mail or through e-mail.  Since TMFStockSpam is a specialty/novelty portfolio, it's not constrained by the same rules as the rest of us.  It's free to red thumb stocks that trade for even 2 pennies. 

I'm not sure the creator saw this at the inception of portfolio, but I believe TMFStockSpam will eventually be top fool and will not be beatable.  I expect a high score and almost perfect accuracy at some point in the future.  When that happens, I will be peeved. 

Quit your whining, right? Wrong.  I don't mind losing to vanamonde, chk999, Bravo, UltraLong, tenmiles, translator999, one of the portefeuilles, valuemoney, msIRA, bridgeboy0, NTMF, TickRTapeKing, TigerPack, GMX, or anyone that follows the same rules that I do.  We all have the same rateable universe of stocks, so I could've done whatever they did to beat me had I been smart enough. 

What I can't accept about TMFStockSpam eventually beating all of us is that the portfolio is not constrained by the same rules.  TMFStockSpam can rate stocks trading below $0.50 that don't have the requisite liquidity.  I'm going to go out on a limb and say that it can probably carry more than 200 picks, like TrackJimCramer or one of those other portfolios. 

I'm pretty sure the original intent of TMFStockSpam was not to beat everybody by belonging to a different set of rules, but I see it happening in the future.  You saw it here first.  I'm curious to see if TMF would respond to complaints in the future (probably from me) that TMFStockSpam is able to beat everyone unfairly.
 

CAPS Community

Reflecting back on my year and a half here, I can honestly say that I've made more money in stocks because I've been a part of this community.  It is impossible to follow every stock well.  You need help from others: FB in real estate, zzlangerhans/portefeuille in biotechs, etc.  I'm glad to be a part of the CAPS community, not only because I've made more money due to it (although that obviously helps). 

I thank those of you who make CAPS a better place.  I especially thank those who have helped me identify investing opportunities.  I hope I've been helpful to some of you as well.

Chipotle

Chipotle is delicious.  If you asked me to choose between expensive steak and a fajita burrito from Chipotle, I would choose Chipotle every time.