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TMFMmbop (38.07)

Win in CAPS; make money in the market

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December 12, 2006 – Comments (2)

After poking around CAPS for a few months now, it appears to me that there are three things you need to do to get to the top. The first two are obvious:

1. Get lots of points.

2. Have good accuracy.

The third key, however, is less obvious:

3. Get points and accuracy that others are not getting.

Here's the thing: To keep pace and have fun earning points and accuracy, it's important to pile on to the ideas that other people have. However, to do better than other people, you need to get points that they're not getting.

To me, this means rating stocks that don't have hundreds or thousands of ratings.

In fact, I think it's important to avoid rating the stocks that have thousands of ratings. Frankly, I think these stocks (apart from the Hidden Gems recommendations) correlate closely to the stocks that have hordes of analysts following them, active message boards, and receive the most media coverage. These stocks, in my opinion, tend to be the most efficiently priced.

And an efficient price means smaller gains.

So here's my challenge to myself and to every other CAPS user: Find a stock that is not rated, research it, rate it. I think you'll do better in CAPS -- and I think a similar strategy will help us all make more money in the market.

tim

2 Comments – Post Your Own

#1) On December 13, 2006 at 7:16 AM, kayakmastr (97.29) wrote:

It also appears that accuracy is extremely important. You will rise above the hordes if your accuracy is above 50%, say in the 60% and higher range. You need to do good research to do better than 50%. A large group of monkeys guessing up or down most likely will have an accuracy of 50%. The TMF folks are doing well in CAPS because their reseach is good, which gives them a good accuracy score!

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#2) On December 13, 2006 at 10:55 AM, TMFMmbop (38.07) wrote:

One comment here:

I believe our CAPS folks mentioned that in order to be in the 50th percentile of accuracy, you need to have modestly better than 50% accuracy -- something along the lines of 53% or 54%.

So, overall, it appears CAPS investors are smarter than a coinflip.

But I actually think that monkeys picking random tickers would post modestly better than 50% accuracy. That's because the benchmark we're comparing accuracy against is the S&P 500, which as its name implies, contains just 500 stocks. But we're able to pick from a universe of 5,000 or so stocks.

That means that rather than being accurate by picking stocks that do better than the entire market, we only have to pick stocks that will do better than a mere 10% of the market -- and 10% of the market that is weighted, in terms of performance, by market cap.

Long story short, if you can pick stocks that outperform ExxonMobil and its ilk, then you will post decent accuracy. That's why I think folks who concentrate on picking small caps and underfollowed stocks will do better in this *game*.

--tim

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