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Author: TMFBreakerDave Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: why shorting wins, why long term loses Date: 7/25/2007 12:18 PM
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Gujwuppermann, my short takes:

Lesson 1: I agree.

Lesson 2: I generally agree, though please note that CAPS rewards people for calling the direction of a stock's move, and the magnitude of that move -- these are not only winning in CAPS, but these are directly analogous to winning in investing, too.

Lesson 3: It's how you want to play it, no? If your aim is just to tune into your real-life portfolio or your CAPS portfolio four times a year (say), you're not going to know in either case how the portfolio did and what was behind any big swings. Actually, at least CAPS documents for you that you HAD these big swings, no? Likewise, if you choose to tune in more frequently -- again, into your real portfolio or your CAPS portfolio -- you'll have a better sense of it. In either case, your real portfolio or your CAPS portfolio, if you're interested in taking the time, using CAPS or the Internet you can click through your different stocks, look at their 52-week highs and lows, look at their graphs, and piece things together pretty well. I fail to see how this lesson is a strike against CAPS -- I think you're talking more about how active (or not) a follower you want to be of your own scorecard (again, in CAPS or in "real life").

Lesson 4: This is maybe the first time I strongly disagree. If long-term riding-out of stock dips mangles CAPS score, it would mangle your own returns, as well. In my own experience, it has not and does not in either. Yes, we'll all have our losers and wish we hadn't sat patiently in certain stocks. However, if it is prudent and rewarding to hold through down times in real life (and it is), the same is true for CAPS (and it has been). Again, the primary scoring mechanism for CAPS has been and remains "alpha" -- the percentage return in excess of the market averages. While there is not a one-to-one correlation, the vast majority of what works in investing works in CAPS, and vice-versa.

Lesson 5: I have had a lot of success with patient outperforms, and CAPS is starting to get mature enough that compounding returns help. For instance, Amazon.com is up 24% today as I write, but for my CAPS scorecard I am getting a Score of +44. That's because my gains are compounding on themselves, just like real life. I agree with you that you can rack up lots of extra points calling Underperform, which is I think a strength of CAPS and in a way a unique value of it. However, I don't think that's what CAPS is about, and good Outperform calls are rewarded just as much if not more as good Underperform calls, in that they compound upon themselves over time and give you Score gains that simply can't be equaled. Remember, though, you need to allow time to pass. You need to be patient. You need to give CAPS time to grow. No one can do what I'm doing with Amazon today after a week or a month or even in most cases a year.

Lesson 6: It's about percentages, as I believe you're stating, so if so I agree. I don't think there's any dynamic though, other than in our own minds, that makes $100 stocks more or less volatile than $10 stocks. I know the temptation is to think "one dollar counts a lot more at $10 than at a $100," but it's also true that ten-dollar moves happen a lot more commonly for $100 than for $10 stocks -- again, in the end, it's about percentages.

Lesson 7: Yes, I agree, though this isn't as easily done as said. But you're right, this can be lucrative.

Lesson 8: Use CAPS at the rhythm that works for you. There is nothing inherently "daily" about CAPS unless you want to make it so. We have players rated 99 on CAPS that barely check their stocks or show much activity, and we have players rated 99 who act several times each day. Again, how do you want to "play" and what are you seeking to demonstrate or to learn?

It sounds as if your main aim for CAPS participation is to get good relevant commentary on stocks you own or are thinking about investing in. The way to use CAPS for this is to visit the page for a given stock, scroll down to commentary, and sort the commentary by most recent (if that's of interest), by number of recommendations (for bulls and bears), and/or by the player rating of the people making the commentary. For active stocks, fresh commentary flows every day. I hope it will be helpful for you. I hope the post above has in some ways helped you appreciate more why this investor, at least, considers CAPS to be one of the seven wonders of the investment world. I would not want to invest without it. I hope you find value here.

Fool on,

David Gardner
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