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Yeah, but can he pick a winner?



July 20, 2007 – Comments (14)

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)


14 Comments – Post Your Own

#1) On July 20, 2007 at 6:27 PM, RonChapmanJr (30.09) wrote:

Not everyone on the leaderboard is a skeptic. :)

Just randomly throwing my useless 2 cents in.

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#2) On July 20, 2007 at 6:32 PM, GyroDynasty (< 20) wrote:

I have no idea why people are complaining.  If you short some of the underperform calls you can make money.  These "haters" have probably made money or better yet have avoided losing tons of it thanks to your knowledge and expertise.  I believe the least a fool can be is grateful of this great community of stock ideas given by awesome people such as yourself.

Nuff Said, GyroDynasty

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#3) On July 20, 2007 at 7:05 PM, XMFSelzhanik (99.79) wrote:

I have zero issue with you as Top Fool, well, or at least being in the top 4, because of your underperform picks.  Your picking stinkers is a fantastic service to the community, and I think, something that makes CAPS special.

But a little intellectual honesty...  While 93 of your 200 current picks are outperform (I haven't verified, but I trust you), 46 of your 393 ended calls are outperform.  To look at only your current picks, and flirt with the term "balanced," is missing something.

I still believe that in the end, those who pick long term winners and ride them for years are going to get highlighted.  Intuitive Surgical, Buffalo Wild Wings, Chipotle, CTrip...  I can see all of these adding a 100 points of score on a weekly basis 5 years from now.  And the beauty is that when people figure this out, they won't be able to copy it.

Unfortunately, it is exceptionally hard to find 200 of those.

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#4) On July 20, 2007 at 7:35 PM, CMFEldrehad (99.99) wrote:

Good points all the way aroud Selzhanik.

I would caution though that looking at my ended picks that way is also a bit misleading as so many of them are re-ups of underperform calls.

That said, this all points to the transparency of the service that I so admire - we all have the ability to delve into the source data, perform our own analyses, and draw our own conclusions.

Fool on!

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#5) On July 20, 2007 at 11:32 PM, genpip (33.57) wrote:

But my question is, should the person sitting in the top seat be there because they were able to pick the losers?  Should the top seat be reserved for someone that at least has a good deal of outperforms?  more than say 10 outperform picks?


just my opinion 

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#6) On July 21, 2007 at 11:47 AM, Capsperson wrote:

I'm not sure why all this lamenting against "underperform" ratings is taking place. Sure, I'm new to CAPS and just learning the strategy, but I think the object here is to study a stock and make a rating on it --be it up or down with credit given to your call. 

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#7) On July 21, 2007 at 2:08 PM, FoolishChemist (92.57) wrote:

I know about the transparency but  analyzing the data isn't as easy as you make it out to be.  Unless you know some secret.  I've tried to copy and paste these things into Excel and it's a major hassle.  A download player history might be a bit much, but additional player statistics tab giving average pick length, out/under perform ratio, out/under perform scores and accuracy, alpha, beta and maybe some other things so people can gauge performance.

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#8) On July 21, 2007 at 6:17 PM, CMFEldrehad (99.99) wrote:

Personally, I agree with your comments Capsperson.  Personally, I think that underperform calls are more meaningful/helpful than outperform calls.  A lot of stocks have a group of ardent fans, but it's the critics that I personally often learn the most from.

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#9) On July 21, 2007 at 6:32 PM, RonChapmanJr (30.09) wrote:

I think one of the issues that people have with many of the underperform calls by the lead fools is that they are not being made against stocks that people actually care about.   It would be useful if good players were picking underperform on a closely followed stock that a significant amount of people might be interested in investing in.  When underperform calls are made on the same piece of junk stock that everyone knows is garbage, then many feel the CAPS system is simply being "gamed".  Being a gamer myself, I can respect that, but I can also see how others would not.

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#10) On July 23, 2007 at 10:41 AM, CMFEldrehad (99.99) wrote:

I understand the complaint here, though for the record (which again is available to all), I have made more than just a few underperform calls on widely followed stocks (Netflix, Sirius and XM, Genentech, Whole Foods and Wild Oats, and quite a few more.).

What I find interesting is that I never hear anyone take issue when someone makes a successful outperform call on a stock that isn't very widely followed.

And as for 'stocks which people actually care about', well, that's going to be a very different basket of stocks for each individual player.

Again, though, my point here wasn't so much to defend my record, or to defend anyone's playing style.  My point was simply to say that one of the great things about CAPS is if one doesn't like the way that CAPS tabulates and summarizes the data, one is free to do it themselves using any method they desire.

That, I think, is a great thing.

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#11) On July 23, 2007 at 5:48 PM, TDRH (97.03) wrote:

You learn early on that the rewards are much greater when picking  a weak company in an underappreciated sector, than picking a strong company and waiting for the market to agree with your assessment.  You can look at all the variable analysis you want, and shout it from the hilltops, but it just will not matter.

 In real life I am not sure I would have the heart/guts  to withstand a 100 pt runup in NFI, even if I knew I was right.

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#12) On July 24, 2007 at 12:23 PM, XMFSelzhanik (99.79) wrote:


Thanks for continuing to bring the commentary back to the quality that CAPS has of making people's records available to all.  I find that to be one of the most educational features of the service (and in some cases quite amusing as well -- thank you Masked Investor).  Regardless of anyone's feelings about underperform picks and their effect on scoring / ranking, you've got to love the transparency and access to the records.

Perhaps I should have paid more attention to your underperform calls on Netflix and Whole Foods...  That might have saved me some money!  I'll have to take a minute and read your pitches on those (hopefully you made pitches).

Which brings me to this.  As an investor seeking to beat the market, I've found there are many more bad investments than good investments.  And that's especially true when focusing on the smaller, lesser known set of companies.  Thus, I would expect that in CAPS, the top rated Fools should have a significantly greater number of underperform picks than outperform.  And that's a noble thing -- if an investor is researching, investigating, and drawing a conclusion, up or down, every time, and then transfering that conclusion (and hopefully some key reasoning) into CAPS, that's a noble and important service to the investor community.  And it should be celebrated.

And let's be honest everyone -- how many of the players with mostly outperform picks are cherry picking from sources such as The Motley Fool's newsletters?  Not that there's anything wrong with that.

Foolish regards,

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#13) On July 24, 2007 at 2:07 PM, CMFEldrehad (99.99) wrote:

Thanks for the kind words and great feedback Paul.

You may have to look at my 'ended picks' scorecard to find my original pitches for Netflix and Whole Foods, but wouldn't you know that because of this transparency thing, they too, whether right or wrong, have been preserved.


Russell (a.k.a. TMFEldrehad)

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#14) On August 04, 2007 at 3:42 PM, DerektheDude (86.02) wrote:

There is a lot to be said for the optimistic Contrarian strategy of investing. It seems to me that this method is similar to a speculator who starts with positive-outlook small-caps and watches their share price multiply times-over.

While some liken it the cheater's way, you can't be criticized for finding underperformers and stating as such. Personally, if we were playing with real money, it would be nice to sort out the rejects before betting on the winners. Keep up your analysis, Eldrehad. It's by these combined contributions to knowledge that we all become better investors.

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