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URL:  http://boards.fool.com/okay-i-predict-that-every-stock-in-the-dow-will-25119698.aspx

Subject:  Re: CAPS is not meant to be a mirror of performa Date:  2/2/2007  9:13 AM
Author:  albaby1 Number:  4808 of 8115

Okay, I predict that every stock in the Dow will be beating the market at some point in the future.

I also predict that every stock in the Dow will be losing to the market at some point in the future.

Let's see how I do. I bet my accuracy with both prediction sets is going to be phenomenal.


That's very likely for de minimis losses and gains, such as might occur during the course of a trading gain. It's probably likely over the near term. But it's less likely that you'll get over the 5% mark for those picks if you make both outperform and underperform calls. Even so, if you were in a world without transaction costs, you could make an awful lot of money in a real-world portfolio exploiting that effect. That's why CAPS has the 5% rule - to lock out exploiting those minimal gains.

The exercise that CAPS is trying to undertake is to get players to assess whether a stock is undervalued or overvalued relative to the market. The expectation is that the stock price will, over time, move (relative to the market) to eliminate the under- or overvaluation. Whether that happens quickly or slowly is not really what CAPS is measuring.

Note that this is a serious discrepancy between CAPS and the real world. In the real world, outperforming the market by 5% in a month is much more valuable than outperforming the market by 5% in a year - yet CAPS scores them the same.

Plus, as noted above, CAPS' require a 5% gain for accuracy points, so it does limit the utility of betting on the variations around the market mean.

Albaby
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