The Great CAPS Accuracy Dilemma + A Personal Shill to Public Accounting Firms
May 06, 2009
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CAPS Rewards DayTraders and Short-Sellers
I cracked the CAPS Top 40 for the first time today, but it will be difficult to move up further given CAPS's heavy reliance on accuracy points at the top. In fact, if you look at the Top 40, I have the lowest accuracy percentage of everyone in there, while my score is higher than quite a number of people. This brings me to the great CAPS dilemma --- do I start trying to increase my accuracy percentage in order to game the system or do I continue to play CAPS similiar to how I would truly invest?
Take a look at the top 20 CAPS players? Take a look at their scores and take a look at their accuracy. You will discover that score hardly seems to matter at the top.
As of right now, BravoBevo is ranked one spot below Dwot. Yet, BravoBevo has a score of 16,870 while Dwot has a score of 7,940. In real investing terms, BravoBevo has made twice the gains of Dwot, yet is ranked lower. You could argue that this is explained by the number of picks they have made, since making more picks increases one's ability to score more points. However, that argument would fail since BravoBevo's average score is 9.40 while Dwot's is only 5.78. Hence, not only does Bevo have a greater total return; but has been making a better average return, too.
While the CAPS accuracy component makes sense on some level since you want to reward those who are able to most accurately pick good and bad stocks - the design of the accuracy component does not make sense. Instead of calculating accuracy based on one's total score on a particular stock, CAPS calculates based on total picks. The difference might seem trival, but it's not at all because it encourages people to short and re-short crap stocks in order to "game" accuracy points. In fact, this is really the only way to move one's self toward the very tip-top of the CAPS pyramid.
An Example
If CAPS calculated accuracy based on the total score on a particular security, this would still favor the short-side, but nearly as much as it does now. To give an example, let's say that Player #1 red thumbs Stock XYZ at $100. Over the next year, it falls all the way down to $10. For simplicity sake, we'll say the S&P traded sideways. Player 1 has a score of +90 on this pick and gained 1/1 for accuracy. He had 99 other picks and was right on 69 of them with a total score of +3000, so this gives him an accuracy total of 70% (70/100) and a score total of +3090.
Player #2 red thumbs XYZ at the same original price of $100, but he ends his pick after every 10% score gain and then re-initiates the red thumb at the new pricepoint. He does this all the way down to $10.94. After this, the stock jumps back up to $32.83, where he finally ends his underperform pick. Player #2 has the same stats on the other picks as Player #1, but for this particular stock, he was able to re-short successfully 21 times before getting burnt on the 22nd try. As a result, he has a score of +10 and gained 21/22 for accuracy. His accuracy total after this pick is 74.38% (90/121) and his total score is +3010.
In CAPS, Player #2 would be ranked higher due to having a signicantly higher accuracy total than Player #1. This is despite the fact that if one did this in real life, they would not have made that much of gain since they got burnt on the last short. This problem could be removed if instead of giving Player #2 credit for every single +5 pick on that particular stock, he was instead given an accuracy score based on his total score for it --- so instead of 21/22, he would simply be given 1/1 for his overall +10 score.
Given the Fool's focus on long-term investing but the CAPS system overrewards day traders and short-sellers due to its overemphasis on the accuracy component,. It's actually significantly easier to find companies that are crap than it is to find great companies and for this reason, you see a lot of red thumbers at the top of CAPS. This isn't to denigrate anyone at the top; those in the top 40 are good investors one way or another and there is real value in being a smart short-seller. But I can't see any value to rewarding the practice of "re-shorting" crap companies.
Naturally, there are other ways to game the CAPS system, but this is the most blatant and the most annoying to me, because I don't want to have to sit around and "re-short" everything after it hits +6, just so I can move up.
Employment in Public Accounting/Valuation
By the way, now that I've got the floor, I wanted to attempt something a bit crazy on here. You see --- the job market is absolutely terrible right now, so I thought I'd take the opportunity to exploit my top 40 CAPS fame (Ok, so it's not "fame" till I crack the top 10 --- which might be never!) to make a long-shot bid at obtaining my dream job. Hey --- don't blame me! Blame portefeuille --- he started it!
So here's the story --- I've been searching long and hard for mid-sized public accounting firms where I could get my foot in the door. I graduated with my Master of Accounting from one of the nation's best public schools and now I'm working with a consulting firm that provides financial management and accounting services to public clients. The people I work with are great, but after being in this industry for about a year, I've concluded it's not where I want to be long-term.
Over the past year, I have discovered the things love. I know what industries I like and I know what work I like to perform. Basically, I've been looking for mid-sized accounting firms where I could work in Assurance Services (auditing, financial statement preparation, etc) and potentially move over into Valuation (which is what I really love doing!).
This might seem like an odd forum for this, but consider something --- the reason why my CAPS rating is so high is precisely because my valuation skills. I have developed ways to value stocks in a very quick and efficient manner --- I adapted it to my particular investing type and it's been a great success thus far. I've even been more successful with my simulated portfolio at KaChing.com, where I've made a 60% return since I created my portfolio in December --- and I'm not a daytrader. In fact, I have one of the most diversified portfolios you will find --- but I invested in wisely.
From all my investing and writing activities, I came to an awareness of the industries I am most interested in: REITs/real estate, manufacturing, cleantech, energy, financial services, and mining.
As far as location goes, I'm not set on living in one particular place. There are a few places I would consider. Due to my interest in urban development, desire to own inexpensive urban property, and be somewhere that I could be active in the community and make a potential difference --- the three cities I want to live in the most are: (1) Memphis, TN; (2) Baltimore, MD; and (3) Raleigh, NC. All three would be ideal for me and have friends in all. I'd also consider many other cities in the South/mid-Atlantic region (my homeland!)
So there you go --- my own CAPS advertisement. Like I said, it's a long shot at best, but it is really discouraging finding absolutely no one hiring these days. Next, I'll have to go out on the streets of Baltimore holding up a sign that says "Brother, Can You Spare a Public Accounting Job?" ;)
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