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iamnik77 (95.48)

The Red Thumb Phenomenon

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November 20, 2008 – Comments (8)

Looking at the CAPS members who are in the top one percent, red thumbing stocks is producing spectacular results. The top members have a high percentage of shorts in their CAPS portfolio and I'm having a difficult time finding any that have even 50% long positions. I am wondering why this practice is apparently much more successful than picking outperforms since you still have to beat the market one way or the other to do well in CAPS. I am also wondering if it is just the flavor of the day and if at some point it will cease to work. Would anyone like to weigh in?

8 Comments – Post Your Own

#1) On November 20, 2008 at 10:03 AM, cubanstockpicker (< 20) wrote:

because we are in a bear market. As soon as there is bullish sentiment most of them will reverse their trends.

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#2) On November 20, 2008 at 10:11 AM, steve3333 (29.79) wrote:

In a market where credit is tight, its easy to pick against companies with high debt/equity ratios.  They can't borrow and will either shrink significantly or fail altogether.

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#3) On November 20, 2008 at 10:21 AM, kdakota630 (29.76) wrote:

More than just that...

By far, most of the stocks here (even the 1-star stocks) have more green thumbs than red, putting the red thumbs in the minority.  When one of those stocks underperforms, the red-thumbs gain points while the green thumbs (usually the majority of the pack) lose points.  The red thumbs are not just gaining points, but gaining points as (typically) the majority lose points.

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#4) On November 20, 2008 at 10:36 AM, outoffocus (23.49) wrote:

To piggyback on cubanstockpicker, fundamentals are not controling the market action.  The market is being controlled by pure emotional pessimism.  Prior to this bear market there were alot of uneducated investors putting money in this market and taking risks that they were not emotionally prepared for.  Also, they were given faulty investment advice by listening to mainstream media.  The market is currently purging those uneducated investors out. Also, last year the market was GROSSLY overpriced.  In some cases stocks are still over priced.  Therefore the market must correct those anamolies in order to return to proper function.

I have seen first hand where companies have reported positive results only to have their stock selloff right afterwards.

Lastly, in order to understand the red thumbs, you have to understand how CAPS calculates their scores. CAPS doesnt care if you actually make money in the game or not. Its maing focus is to beat the S&P.  So if you go long on a stock and it goes down 20%, if the S&P goes down 40%, you still get 20 points. You lost money but you beat the market.

  On the other thumb, Say you red thumb a stock.  That stock drops 10%, the S&P drops 5%.  According to CAPs, you've just made 5 points (10-5=5). For ever point the stock drops you earn a point, net of what the S&P drops.  Now if that stock goes down 10% but the S&P goes up 5%, you've made 15 points (10 +5 = 15). If you greenthumb this same stock, you would lose points in the same manner. 

Unfortunately I found all this out the hard way. It is why I'm pareing down all my greenthumbs and putting up more red thumbs.  If you check my profile you'll see that my "short" positions are my highest scorers while my "long" postions are bringing me down big time.

 

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#5) On November 20, 2008 at 10:38 AM, socialconscious wrote:

Yep a cool perma bull until I found out in these time that was BULLpucky. Even Inwestor biznus daily know the M in CAN SLIM is the market. In short the market is KING. The king's name is Fund first name Hedge. 

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#6) On November 20, 2008 at 11:37 AM, charlesblazer (52.34) wrote:

In theory, however, prudent green thumbs should outscore red thumbs in the long run.  Green thumbs have higher potential upside (theoretically unlimited), whereas red thumbs, at best, can only score ~100 points. (to be more precise: in a bear market, red thumbs are actually limited to something less than 100 points; and in a bull market, red thumbs can potentially score more than 100 points, but usually not much more) This is because the upward movement of the S&P during a bull market decreases your score on green thumbs and increases your score on red thumbs, whereas the downward movement of the S&P during a bear market increases your score on green thumbs and decreases your score on red thumbs.

Thus, if one were truly prescient, the best strategy would be to green thumb winners during a bear market (such as this one), then mix green thumbs on big winners with red thumbs on laggards during a bull market.

No one here is prescient, however.  So it is generally easier to red thumb obvious losers, regardless of the market.  Hence the "practical" strategy is outperforming the "theoretical best" strategy, for the moment.

If you want to find ideas for green thumbs, I suggest you sort the player list by "Highest Average Score Per Pick."  This tends to unearth players with a few multibagger green thumb picks rather than hundreds of correct red thumbs, because (as I said before) prudent green thumbs have the potential to drastically outscore red thumbs.  A few smart greens can have a high Average Score and a low Total Score, whereas hundreds of correct reds can have a low Average Score and a high Total Score.  Both will have high accuracy.  You should be careful with that "Highest Returns" list, however, because some of those players may have been lucky with their initial few picks, made months or years ago, and they are no longer active, and therefore they won't be much help to you in finding stocks to green thumb today.

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#7) On November 20, 2008 at 12:09 PM, iamnik77 (95.48) wrote:

Thank you all for your input, especially charlesblazer with your well thought out comments.

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#8) On November 20, 2008 at 2:07 PM, Tastylunch (29.40) wrote:

or you could sort by "yes man" players who only green thumb have that charm.

 

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