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TMFEldrehad (100.00)

The Power of the Red Thumb

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December 29, 2006 – Comments (18)

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.

18 Comments – Post Your Own

#1) On December 29, 2006 at 2:40 PM, Apollyon11 (26.41) wrote:

I agree completely.

And, as in outperform calls that don't materialize immediately, we must wait them out. I picked (and own) Netflix (NFLX) some time back and conversely chose BlockBuster (BBI) to underperform eventually. Well, BBI has climbed a lot since then, but I'm holding out that I am right about the long term.

Also, people need to remember that when we say Underperform, we mean vs the S&P, not necessarily going negative. That means a lot.

-Tony

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#2) On December 30, 2006 at 1:25 AM, Alokasi (< 20) wrote:

"......and you’ll help make CAPS smarter too."

And that's what we're all after, isn't it?

Apollyon11 wrote:

"Also, people need to remember that when we say Underperform, we mean vs the S&P, not necessarily going negative. That means a lot."

Good point.

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#3) On December 30, 2006 at 6:05 PM, dwot (99.50) wrote:

I did a few to many of those to start, and I was butchered at first...

And I did them without really checking out the stocks, or understanding this game is compared to the S&P. At some point before xmas this thing was telling me 95% of players were better than me...

I think my ranking is probably one of the most improved in the past couple weeks.

Here's another tip to improve your score, strictly based on math...

Say you've done your homework on a stock and you know it has to perform, so you give it a overperform ranking. Now, say the stock drops 20%. For math purposed, say it was $5/share and now it is $4/share.

If you end that stock and re-enter it, you will record a 20% loss permanently. But, now say the stock does what you excected, and climbs to say $6. You now have a 50% increase, less the 20% loss for 30% to your score, instead of 20%, but you must also take from that 30% that you also have a win and a loss on your accuracy ranking, which makes up 1/3rd of your score. Stay the line and you'd have a higher accuracy.

Whether this tip works will depend on how many stocks you rate. If you rate a lot of stocks, the loss of accuracy will reduce your score much less than going for that extra leverage of the percent increase. If you only have say 10-20 stocks in the game, well, it might not be a good tip for you.

But, consider that the further your "has to go up stock" declined, the greater the leverage of the turnaround from just taking a loss and restarting the stock. A dollar on a $4 to start stock has 25% loss for $1, but a 67% gain if stopped and then restarted at $3 and it makes it to $5.

Of course, the downside is that if you are completely wrong, you will end up with a greater decline in your score, so if it went down another $1, you'd lose another 20%, where as if you ended and restarted, you'd lose an additional 25% plus some of that accuracy score.

I've done this with one stock that is way down right now, and I'm convinced it will be a 3-6 bagger in 3-5 years.

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#4) On December 30, 2006 at 7:44 PM, LovinMe (91.08) wrote:

I love this take on CAPS and under performance calls! With so much Bull around 2006s end I'm betting many people feel uneasy putting the red thumb on anything. We end up letting our Bears hibernate through the storm when perfectly legitimate 'losing stocks' are ripe for the picking.

But beyond that I want to double back on Apollyon11's comment:

"Also, people need to remember that when we say Underperform, we mean vs the S&P, not necessarily going negative. That means a lot."

I agree with Alokasi, it is a very good point. But we should also keep in mind that the S&P is like the turtle in our race and our picks are merely feeble attempts of kicking our rabbit past the finish line as quick as we can.

Of course, it all comes down to how informed a CAPS players decision is. Hopefully most of us are pulling away from giving a rating based solely on a few pitches we read under a green-smiley faced stock price.

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#5) On January 08, 2007 at 10:57 AM, 11Below3 (< 20) wrote:

comment

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#6) On January 08, 2007 at 12:40 PM, Westfall27 (33.88) wrote:

I disagree. The reason you're CAPS rating is so high is because you've always had the maximum number of picks (200), this obviously puts you at an advantage when compared to someone who has only had say 20.

Of course, I just added enough picks to get me to the maximum, so I'll be passing your CAPS score shortly.

Best Regards,

Westfall

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#7) On January 10, 2007 at 10:58 AM, clearbranch (< 20) wrote:

Yes, but just look at how clean my CAPS page is without all those little lucky charms cluttering up the area. :-)

The view from the bottom looks pretty good...the only way from here is UP!

CB

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#8) On January 13, 2007 at 2:17 AM, Novavm (99.93) wrote:

Sorry to disapoint you Eldrehad,

but you are not the real winner in this site.

The calculation of results overhere is totally wrong and wortless.

By simple analis i found out that false credit is given to the shorts.

Let say you made 10% gain by being short

and mean time S&P made 5 % gain.

What is the real difference in gain 5 %.

What system give you 15%-LOL.

Let say player B made 10 % as long in a position and S&P made the same 5 % gain.

What is the real beating of S&P 5 % and system give real 5 %.

Whole 10 % false difference in the short case.

Both players have returns 5 % better than S&P.

But the shorty got whole 10 % false bonus.

You ended hundreds of short winning positions and got false credit.

thus if results are calculated without this falsification and giving wrong credit i do not thing you will be the winner here.

So shorthly power of Red finger here is making this game useless.

I wrote to The Motley Foll hopefully they correct this abnormality.

Otherwise it is really Fool and worthless game ?

Tnank You for the attention !!!

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#9) On January 13, 2007 at 2:40 AM, Novavm (99.93) wrote:

To add to my my previous point.

Let say player A makes 200 short picks

and player B 200 long picks.

If S&P makes 5 % gain

and both long and the short guys make

4% gain in their direction.

By current calculations A will get 200X 9

1800 points and will be 100 % right.

That 1 first place.

Player B will have 200 X (-1)=minus 200 points and 100 % wrong garanteed last place.

Well actually both players lost 200 points compare to S&P gains.

This makes this competition worthless and waste of time.

I hope they correct this silly calculation.

Otherwise this game is worthless.

Do not understnad me wrong please !!!

I am just trying to help this site to become

real investing chalenge site ,so we can have

benefits in our real investing.

If they do not correct the mistake i would be first out of here .

Probably everyone who find will too.

So far otherwise i really like The Fools and hope that they will correct this huge mistake.

Perhaps ,

If they don't correct maybe instead of quiting i will

make new portfolio with 200 short penny stock and show the foolishnes of the competition.

Well for short period i will be the Top Fool until other fools catch the scam.

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#10) On February 03, 2007 at 7:33 PM, JFund (43.93) wrote:

I agree with Novavm. Any time I see the "Skeptic" icon on a player's CAPS page, their performance loses its credibility. However, I like to look at a player's picks whose rating is high AND who makes mostly outperform calls. For this reason, I like to follow the top Wall Street players most of the time because they do not make many underperform calls.

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#11) On August 01, 2007 at 4:11 PM, BrianRuth (99.03) wrote:

I do agree with you Eldrehad, but for one thing. In the short term, yes, I think red thumbs can help your score. I almost feel bad racking up 25+ points for every trashy smelly pink sheet stock I can find. The problem lies in the fact that it's hard to make more than 100 points off a short unless you reload on the way down, and with the $100 million entry barrier, you don't get too many chances to do that.

Over the long term, the best point-getters are those mid-caps that are poised to explode (like, say, a company becoming profitable for the first time). I have been fortunate enough in my real-life stock picking that I've managed to bag 2: ATI technologies (at about 4) and Apple at 15. The former was a 3-bagger before AMD destroyed a big hunk of the equity and I've sold out of my starting position on the latter (so it's pure profit now), which stands as an almost mythical 10-bagger. I know that over the long term, these kinds of picks are the ones that will help my portfolio the most (both in real-life and on CAPS). It's a lot harder to find these than it is to dump on crappy pink sheet stocks.

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#12) On August 09, 2007 at 3:35 PM, jack21222 (98.99) wrote:

Novavm:

 Your examples are if the S&P is up 5%. What if it is down 5%? Then, a stock that goes up for a green thumb has more power than a stock that does down for a red thumb. 

 A majority of my underperform calls have been just before the S&P started its recent landslide. 

 For example, NYT is down over 11% since my red thumb extended forth. But, I only get 7 points on it because the S&P is down over 4%.

 You can't criticize the "fairness" of the game when the same picks are available to everybody. You had just as much of an ability to pick off the low-lying fruit as anybody else here. If you seriously believe underperform calls have an inherent advantage, then pick 200 stocks to underperform.

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#13) On August 28, 2007 at 4:06 PM, kevinjyc (83.39) wrote:

Guys Novavm is right.  I don't know if anything should be changed in the game but in the real world many of these shorts wouldn't make any money.

In the real world, for a real portfolio to beat the S&P by shorting stocks the decrease in value of the stock has to equal the increase in the S&P.  If I short 100 shares of a stock at $15 and sell at $13.50 I profit $150.  In the meantime if the S&P has gone from 1500 to 1650 points you would make 10% on an index fund.  Basically in this case you are only tying the market average even though in CAPs you would earn 20 points. 

  In a bear market, however, CAPS doesn't reflect the advantages shorts have in a real portfolio because if the whole market is down 10% and your short returns 10% you are now beating the market by 20 points in a real portfolio even though in CAPs you'd have no score.

I honestly think it is probably better to keep things as they are because I think it encourages more people to make underperform calls and this will help rate stocks better for a portfolio that will be all long.  Otherwise you're asking people to time the market as a whole which isn't what we are trying to do.  But you should definately recognize that it is impossible to tell if a leader with a lot of underperform calls is actually a good stock picker in the real world.  In the real world you have to hold mostly long stocks because the market generally goes up in the long run.

 

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#14) On October 30, 2007 at 5:58 PM, meatsock (21.59) wrote:

i have read and understand you're rational here. but as i am a pro gamer and have gamed for many years, please allow me to comment. every game can be beaten,,, the skills needed to beat a server or a game do not nessesarily correspond to real world rules, they pertain only to the server being played.with some study,, one can find a way to beat any collection of players on any particular server.. i see that you have learned how to rise to the top of this particular servers version, and thats commendable, but it is not real world, it's this version. i wonder if youre proficiency would transfer into profits for a real world invester and i think not as you have been accurate in choosing losers, but have you chosen winners as a majority of your'e pick,,, no. i appreciate your'e not losing money, but i'd like to see you make some. pardon my critisisum and spelling, i'm new and spelling isnt my priority here.

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#15) On November 02, 2007 at 1:05 PM, jeffloun (84.03) wrote:

Novavm:

What if, in the real world I short a stock for $1000, then put that $1000 (because you get the cash from a short sale) into an S&P index fund. Now when the S&P goes up or down and my short wins or loses, this game will accurately reflect my overall win/loss that would have occured had I actually made the picks in real life

In real life, you get the choice of what to do with your cash from a short sale, you might not put it in the S&P, you might stick it in your mattress if you think the S&P is going down as well, but in this game, it isn't that complex so you are forced to 'buy' the S&P with any short sale $ to make it simpler.

As jack21222 stated, if the S&P is going down green thumbs get a bonus and if it is going up (historically/statistically this is going to happen more) then red thumbs work better. But the point of the game is to 'beat the market' and that is represented by the S&P so it makes perfect sense how it is set-up and how it is playing out.

Happy investing all!

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#16) On June 23, 2008 at 3:11 PM, Rep07 (27.66) wrote:

As shorts go down in CAPS they should periodically be closed and then immediately reopened.

Reason: Short at $10, goes down to $5 = 50% gross gain before comparison to S&P.

Stay open, and it goes down to $3 = total 70% gross gain before comp.

But close it at $5, reopen, and it goes down to $3, you get another * 60% * gross gain before comp, for a total of 110% of gross percentage gains on the stock (before comparison to S&P).

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#17) On June 25, 2008 at 7:10 PM, TheWaveIsComing (< 20) wrote:

Novavm is missing the point of the rating system of Caps.  Looking at the game you have to put all thoughts of real world/real money brokerage management out of you head and look at it very simply.  When you red thumb a stock your goal is for that stock to do worse than the S&P 500.   Simple as that.  If your stock is -15% and the S&P is +5% then your stock is doing better than the market by 20%.  Simple math.  It is, in the purest sense, measuring relative strength using the S&P500 as the basis.

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#18) On July 20, 2008 at 2:50 PM, earthStrapped (25.29) wrote:

Great comments. Red thumbs are vitally important to CAPS.  Without them, there could be no discernable spread between a one star and a 5 star stock.  But from the standpoint of measuring the strength of a player, I agree (on suspicion alone) that outperform calls are harder to get right, whether the market is advancing or declining.  I don't think there's anything wrong with the game.  But I for one would love to be able to define my own formula for rating a player and see who rises to the top.

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