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Something I hate about CAPS

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August 13, 2007 – Comments (17)

is that there's no way to add "money" to a stock when it gets cheaper. That's how I've made tons in the real world, by picking up bigger chunks of companies when they're punished for no reason.

for this reason alone, I don't think caps is very good at all at quantifying investor savvy.

Sj

17 Comments – Post Your Own

#1) On August 13, 2007 at 2:09 PM, TMFJake (44.05) wrote:

Of course, CAPS let's you do this if you're making a new pick. So, you can indeed demonstrate your investor savvy by picking up a stock at a point in which it is unloved by others.

For the stocks for which you currently have an active position, I agree that, other than the signal you send when you don't close, we don't provide a great method to communicate your confidence in the investment opportunity.  

We discussed some form of limited "double down" capability or some other form of confidence indicator.  Obviously, we're not representing share-based portfolio, so my question to you is whether you are looking for a better means to communicate your confidence in an investment idea, or are you looking for a way to improve score, the equivalent of dollar cost averaging?  I'm sure you want both, but which is more important? 

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#2) On August 13, 2007 at 3:16 PM, TMFBent (99.82) wrote:

I'm not sure I'm after either of those, as I know they'd be tough to impliment. I'm just grousing. CAPS measures many things, but one thing it doesn't do a good job with is a sort of real-world takeaway. I'm not sure it ever could, however, because with play money, decision-making is much different. We'll all take swings with free capital that we'd never take with our own bucks. Similarly, we might not take the gimme's with real money because the fear of loss can stop us in our tracks.

But one thing that's especially frustrating is not being able to redeem bad timing on a good company by being able to double down when it gets dropped. (or even when it rises, I suppose. Doubling on the way up is also a good strategy with the right companies.)

Like I said, just complaining. I'm not sure this is anything that can be addressed in caps. Caps isn't the real world, as we're all aware.

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#3) On August 13, 2007 at 3:21 PM, Loychster (96.74) wrote:

IMHO, it needs to be a material way to express your confidence in an investment idea. I would love to reiterate my strong buy recommendation on SAFT, but other than post it in my blog or make a comment on it, it does not really show up materially in my portfolio. It wouldn't really have to go towards your accuracy,  but it could go towards your points. I would think it would have to count toward your 200 stock max though, otherwise your could continue to vote stocks as they dropped in price to lower your cost basis while still being able to pick alot of other stocks. If it counted toward your points and toward the 200 stock max but not toward your accuracy, you as a player would have to be more committed to the stock than another random pick that you may make. Hope that makes sense.

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#4) On August 13, 2007 at 4:40 PM, EScroogeJr (< 20) wrote:

In my opinion, the fact that you cannot double down is an accurate simulation of real-world investing, which is always subject to financial constraints. Your model would certainly work for an abstract investor with an infinite supply of new money. For the average Joe Schmuck with $9,000 worth of stocks and an unused $1000 in his Scottrade account, the decision to double down is often difficult or impractical. Most typically, he would have to sell his solid, reliable and undervalued JNJ in order to take advantage of today's plunge of the promising, oversold but still risky  and speculative FLML.

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#5) On August 13, 2007 at 4:54 PM, seanleckey (99.79) wrote:

I completely disagree. Why should putting more money into a losing position be a sign of savvy? It should be a sign that you were wrong so far.

If putting more money behind  lagging stocks has worked for you in the past, why don't you  simply  wait until the stock goes down before you put money behind it in the first place.

This is just another case of magical thinking.  

Why doesn't CAPs understand that all my losing positions are just part of my "strategy"? 

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#6) On August 13, 2007 at 5:29 PM, TMFJake (44.05) wrote:

Why doesn't CAPs understand that all my losing positions are just part of my "strategy"?

:)  Yes, we're working on that.  Seth, has been requesting this for some time now.

While I think someone put sour milk (or worse) in Seth's Wheaties this morning, I do agree that CAPS can do more to express "level of confidence."  And while a losing position first and foremost communicates that you've been wrong to date, I think that it is instructive to be able to distinguish between those picks that you still firmly believe in versus those that you are keeping open because you can't stand to end a pick that's in the red, regardless of whether that's a smart strategy or not....

I agree with EScroogJr that I think it's problematic to create a scoring opportunity around this double down capability (although there are some here at Fool HQ advocating for this), but I think creating a better way to communicate confidence levels would be a value add.

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#7) On August 13, 2007 at 5:35 PM, vkrish98 (40.28) wrote:

I agree with tmfbent. However on the flip side, in CAPS you have infinite capacity to buy new stocks but in real life (atleast for me) you have to shuffle your money between stocks and it has always been a hard descision for me when i see an underpriced stock and i do not want to sell any of my other picks.

 

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#8) On August 13, 2007 at 7:44 PM, muji (51.32) wrote:

You can buy any number of "new" stocks you want.  CAPS has never been about reality, nor the financial restrictions most of us have.

I agree with Seth that it's downwrite silly you cannot open another position on an existing pick. My score would be a whole lot better if that was the case.

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#9) On August 13, 2007 at 11:00 PM, TMFJake (44.05) wrote:

Again, it's the difference between a portfolio game and a ratings service.  CAPS asks you to make calls (not buy stocks) and compare your performance against the CAPS community and Wall Street pros. 

A ratings service enables you to be rewarded for being right across a larger number of stocks than you might put into a real world portofolio, but it does not allow you to cover for your mistakes as you might if you could dollar cost average within your portfolio holdings.

If First Albany makes an outperform call on  NFLX in April, it's useful to hear them reiterate that position in August after the stock has fell 20%, but I'm not necessarily going to feel like rewarding them for that reiteration.  I'll evaluate their performance at the end of the time frame established with their call.

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#10) On August 14, 2007 at 10:36 AM, Loychster (96.74) wrote:

If you look at it in the perspective of the Motley Fool, the newsletter writers have been known to make a call several times on the same company if they feel that the current value of the company is that compelling. If they can do that in the newsletters, I don't see why it is considered "magical thinking" here on CAPS.

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#11) On August 14, 2007 at 12:33 PM, TMFBent (99.82) wrote:

well, magical thinking was sean's term, and I don't understand his theoretical opposition to the idea. If someone picks something and it turns out to be wrong every time, then we'll know. If someone picks something that drops and does (as he might in real life) double down, and the stock goes up, he'll reap the reward on one position, less (or nothing) on the other. Similarly, if one doubles up on a position (as I also have in RL), he'll get the added benefit.

Of course, Caps isn't RL, so I don't expect any of this to happen. And in fact, this would open a can o worms with the whole accuracy thing too.

John was wrong about my wheaties, though. I didn't have any. Though that could have been the problem, too.

I recognize the need for caps to be simple. But some of what happens as a result will always aggravate me, sort of like the fact that I have to listen to American Idol promos during the simpsons.

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#12) On August 14, 2007 at 12:46 PM, maverickpl (76.21) wrote:

It seems there is a very simple solutions for any player that is a hyper-active player (uses most of their 200 max picks). Simply close your position on the way down and then keep opening and closing it on the way up. Since there are no "fees" the only hit one takes is to their accuracy, but if you have several hundred picks then the hit of a single incorrect pick can more than be made up for if in fact you are correct and make multiple correct picks on the upswing. In this "20% downturn" scenario people are using you could get a little more than 4 correct picks in (your stock must rise 25% to reach your initial starting price) plus a lower initial starting price assuming the S&P doesn't change. Of course, if you are wrong, then you've banked a incorrect pick and you've got another one on the books. Hence you've essentially doubled down on your pick.

 

While this only works for people with lots of picks, the majority of the top players use all 200 picks.

 

I've got a feeling the TrackJimCramer player does this unintentionally all the time and if Jim were a better stock picker he'd far and away be the leader of this game because of it. 

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#13) On August 14, 2007 at 2:37 PM, TMFBent (99.82) wrote:

Jim Cramer also gets a lot more fake capital that the rest of us, so his track record is truly horrible.

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#14) On August 14, 2007 at 3:48 PM, HistoricalPEGuy (62.62) wrote:

I personally like putting my real portfolio up there to see if it "stacks up" - and I love doubling down.  Hell, I'll even just throw a little dough at a stock just so I pay attention to it and then try and dollar average the bottom (I'm kind of a value investor as my name suggests).

However, in CAPS, there is no feasible way to do this unless you have a "salary cap" or limited money supply.  Which, of course, flies in the face of how people win in this game - by picking hundreds and hundreds of stocks.  Good thought, Seth, but it just won't work in this forum.  Many of us value investors use dollar averaging very successfully - this just isn't the place to show it off.  Much better for the speculative investor.

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#15) On August 14, 2007 at 9:49 PM, ajfabb (96.85) wrote:

As a tradeoff between complexity and the desire to double-down, how about introducing a single double-down allowance per-player.  That is, you can double down on a pick (getting double points as it moves your direction and negative double the other way), but only on one position at a time.  This would give you a single "mulligan" or get-out-of-jail-free card, without  really amplifying the way that people already game the Caps system.

I'd love to have used this on one of my picks today! 

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#16) On August 15, 2007 at 4:01 PM, hudsondusters (90.08) wrote:

I'll tell you what I hate about caps.  That your score (i.e., TMFBent jayson) is completely goosed by shorting OTC stocks that you couldn't short in the real world because they aren't marginable.  Look at all those .ob shorts on your list.

Nice call with CFC by the way.

Oh, and you are being a little harsh on Viniar.  He isn't saying subprime housing bubble burst wasn't foreseen.  These guys are long and short. what happened was that all the quant models had them forced selling their "good" stuff and covering their shorts on crap all at once.  Which also should have been forseen, and isn't 25 sigma, but it is not at all the same thing you are saying a lot of the MF cassandras were calling.

Get it?  Two different disasters going on at once. 

Also, this is more like a market run.  Thornburg got slapped around even though it has a pristine default history.  It's just that the vaunted liquidity all dried up at once.  EVERYONE is tarred with the same brush.  But it doesn't matter because once confidence is gone, you can't do business in this world.  Didn't matter that Thornburg isn't in the business of lending to subprime, ALT-A.

Finally, of course you should be able to double down in caps.  The person who said you should wait to buy until you know it has bottomed is foolish with a lowercase f.  The amount you put into various bets also should be factored in.  

 

 

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#17) On August 15, 2007 at 4:15 PM, hudsondusters (90.08) wrote:

I'll tell you what I hate about caps.  That your score (i.e., TMFBent jayson) is completely goosed by shorting OTC stocks that you couldn't short in the real world because they aren't marginable.  Look at all those .ob shorts on your list.

Nice call with CFC by the way.

Oh, and you are being a little harsh on Viniar.  He isn't saying subprime housing bubble burst wasn't foreseen.  These guys are long and short. what happened was that all the quant models had them forced selling their "good" stuff and covering their shorts on crap all at once.  Which also should have been forseen, and isn't 25 sigma, but it is not at all the same thing you are saying a lot of the MF cassandras were calling.

Get it?  Two different disasters going on at once. 

Also, this is more like a market run.  Thornburg got slapped around even though it has a pristine default history.  It's just that the vaunted liquidity all dried up at once.  EVERYONE is tarred with the same brush.  But it doesn't matter because once confidence is gone, you can't do business in this world.  Didn't matter that Thornburg isn't in the business of lending to subprime, ALT-A.

Finally, of course you should be able to double down in caps.  The person who said you should wait to buy until you know it has bottomed is foolish with a lowercase f.  The amount you put into various bets also should be factored in.  

 

 

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