The Power of the Red Thumb
I’ve written a couple of times in blog posts about the power of being a contrarian, especially here in CAPS, but it’s a lesson that I think carries over into real-life investing as well.
Well… I’ll warn you, I’m about to write about it again – so if you’re bored with my contrarian musings, you might want to click to another page now – if not, there’s something I think worth adding and it has had profound implications for me in CAPS and may for you too.
This phenomenon is the power of the red thumb.
I think it’s no mistake that many of the top rated CAPS players aren’t afraid to call underperform on stocks – there’s a reason.
The reason is that calling underperform, almost by its very nature, is a contrarian position. Sure, there are real dogs like Pegasus Wireless where the red thumbs outnumber the green thumbs, but that’s the rare exception in CAPS.
Take one of my underperform calls, Evergreen Solar (ESLR) as an example. This stock has a one star CAPS rating currently yet the green thumbs outnumber the red thumbs by more than 3 to 1 among all CAPS players. While the margin is much narrower among all-stars, even among this group the green thumbs outnumber the red. One could call underperform on ESLR and gain the benefit of the double-whammy of one’s score improving while the scores of most of the other CAPS players weighing in is declining – all for taking the contrarian position of calling underperform on what’s already a lowly one star stock.
On highly rated stocks, the proportion of green to red thumbs is even more lopsided.
Since player ratings are relative, and since globally in CAPS green thumbs outnumber red ones by a very wide margin (even among many of the lowly one star stocks) I think it’s no coincidence at all that most of the highly rated players are not afraid to break out the red thumb.
If you want to climb up in player ratings, I’d strongly suggest making at least a few choice underperform calls a part of your CAPS repertoire – your player rating will thank you, and you’ll help make CAPS smarter too.