Yeah, but can he pick a winner?
I've been reading a few blog entries and discussion board posts lately lamenting that the CAPS leaderboard seems dominated by underperform specialists, leaving some Fools asking, "Yeah, so he or she can pick stinkers, but how does that help me pick winners?"
This is an interesting question, and one I thought I'd share a few thoughts on. First, in order to pick winners, I've personally found it very helpful to know how to pick losers. Call it the "Cat in the Hat" investing philosopy. To find out where something is, one must first find out where it is not. Whether it's an obvious red flag, or something that perhaps only rises to the level of wanting to closely watch going forward, being able to spot the possible weaknesses or pitfalls a company faces is an incredibly valuable investing tool. Inventory or receivables growing faster than sales without a good explanation? Income statement looks great, but the cash flow statement's been lagging behind? While neither of these necessarily portends trouble, thinking like a 'short' when analyzing a company can be a very valuable tool.
One other point I'd like to make while I'm on the subject... if you want to know how good someone is at picking winners, all you have to do is look. I believe that the single greatest feature of CAPS is its transparency. Every pick, active or ended, outperform or underperform, is recorded and can be analyzed by anyone, using any method they desire. Sure, it'd be easier if CAPS made the calculations for you, but if you want to know how someone does at 'picking winners', the information is at your fingertips.
With that in mind, I decided to take a look at how yours truly is doing on that front.
As of this writing, I have 200 active picks of which 93 are outperform calls and 107 are underperform calls (a bit more balanced than even I thought, as I never really counted them before).
My total score for my outperform calls is about 621 points, for an average of about 6.7 points each. My accuracy is close to 50/50 (actually about 48%). Sure, my accuracy among active outperform calls isn't the stuff becoming Top Fool is made of (he said grumbling having gone long on a basket of homebuilders a bit too early), but I'm not really all that displeased with it.
You see, because CAPS is so transparent, I'm also able to tell exactly how long each pick has been open. My average outperform pick has been open 359 days as of this writing (about a year). This means my outperform calls have, on average (and for you math geeks I know that looking at averages here isn't the most pure way to look at this, but it should be relatively close), outscored the S&P by almost 7% per year.
Okay, maybe my opinion isn't the most unbiased in the world, but I'm personally rather pleased with that. Beating the S&P by 7% over a full year over 93 picks is something that I don't think is all that easy to do. Yeah, I'm getting trounced by at least a couple of Fool newsletters, but how many spew out 93 recs a year? (Not that it would be a good thing if they did!) Granted, it is only one year. It could well be a fluke and time will tell if I can keep that up, but if my real-life portfolio did that well year after year I wouldn't be complaining.
And that's one of the true beauties of CAPS. The data is all there for us to look at, digest, slice and dice, to our heart's content - whether it be to examine our own performance, or that of one or more of our fellow Fools.
So, can I pick a winner? You've got acess to the data, you tell me. And if I can, will my track record stand the test of time? Again, the data will all be there for anyone, and everyone to see, digest, and assign their own meaning and weight to.
And that, in this one Fool's opinion, is one of the greatest, if not the greatest, features of this service that I've grown to love.
Russell (a.k.a. TMFEldrehad)