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Author: TMFEldrehad Big gold star, 5000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 122  
Subject: Re: Nov 1st Date: 11/2/2006 1:51 PM
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That's a great point, and similar to one that was going through my mind. I fear that the 5 star stocks may have 5 stars because of past performance.

One other thing that's come to mind regarding the CAPS 1 and 5 star indicies is that I wonder if rebalancing them is the best idea.

Imagine a 5 star stock has a poor earnings report, and sentiment changes due to an overreaction and the stock gets pushed down into 4 star territory. In such a situation, the index portfolio might be 'selling' at one of the most inopportune times. It would be more meaningful to me, personally, for an index, once set-up, to never change and hold through the peaks and valleys. Rather than rebalance monthly, what I'd do is to create a brand new index monthly while leaving the previous index alone - and then aggregate the results of all of the indicies.

It sure is a lot more work, but to my way of thinking would paint a better picture as to whether or not 5 star stocks outperform long term. The way it stands now, these indicies might be trading in and out of stocks quite a bit as sentiment temporarily changes. My concern is that we might get results down the road that appear long term (by looking at the long term perfomance of the index) but which are, in reality, based on a lot of short term trades (as stocks fluctuate between 4 and 5 stars and are continually 'bought' and 'sold').

Again, I haven't the time to embark on such an endeavor, but I think that would be perhaps a better way of tracking the performance of 5 star stocks.

Regards,

Russell
a.k.a. TMFEldrehad
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