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lessons from CAPS....

although i joined TMF as a subscriber in January this year (2007) to Stock Advisor, i never got around to using CAPS until we (self and husband) were just about ready to kick off our own portfolio. so the first thing i did, after running my screen and doing a bit of analysis, around June, was check the CAPS players' takes on the results, and dump these results in as my picks ie the stocks with which i was intending to populate my real world portfolio, to see what would happen.

Lesson 1: it is nice to be able to see what others (presumably more experienced people who are also interested in creating a profitable portfolio) think about the stocks i have picked as a basis to commence investing.

Lesson 2: not every CAPS player is interested in actually investing in the stocks being discussed, so their take on a pick may be more to do with winning in CAPS, than winning in the real world.

i first assumed that having entered my picks, quite naturally, to my (then) impression of how CAPS functioned, i would check back in a few weeks or whenever, to see how the stocks were faring relative to the SYP index. so i received quite a shock when i did check back after the lapse of some weeks to discover my "score" has soared extremely high....and plunged to the equivalent depth. but i could not identify the stocks responsible for this. so i started tuning in a little more frequently.

Lesson 3: Unless one keeps track of how one's score changes on a daily basis, it does not appear possible to historically analyse any large changes in "score", in other words, to analyse, which stocks, relative to the SYP index, have resulted in these large swings. This "minute-minding" approach is in sharp contrast to the "buy-to-hold" attitude of the TMF.

i also thought i should try to become a little more adventurous in my stock picking, still with the goal in mind of trying to find how my picks were viewed within the CAPs community, and still with the goal of finding stocks that would, over the long term, outperform the SYP. i found my score dragging, and finally "ended", against my intended investment strategy, a number of stocks which continued to dive.

Lesson 4: Long term riding out of stock dips mangles "score".

then i started to look at what the terrific high scorers were actually doing.

Lesson 5: don't call outperform. call underperform, if "score" is important. calling outperform on a stock which has already "outperformed" and is popular amongst the majority of players is also likely to have a nasty impact on score if the stock price drops, even slightly.

Lesson 6: if calling outperform, do it only on expensive stocks. a fall in price is measured as a percentage of the price, and therefore has less of an impact on "score" than calling "outperform" on a cheap stock. a one dollar drop in price on a $10 stock will have a 10% impact, wheras a one dollar drop in price on a $100 stock will have a 1% impact.

Lesson 7: call underperform, conversely, on cheap stocks heading south. these have a nice impact on "score" particularly if the SYP is having a good gain day.

Lesson 8: use CAPS to see how a pick performs on a daily basis relative to the SYP, if one is interested in seeing the short term losses and/or gains, remembering, of course, that the unit price of a unit of the SYP is the weighted average of 500 stocks, and the unit price of a "picked" stock is for itself, resulting in a considerable skew when "adding" these two percentage changes together.

all of which may or may not have been said before, by people considerably smarter than i. quite probably most players have been aware of how CAPS functions from their first play. my lessons have led me to disappointment because i am not looking for community intelligence on stocks in which i would not invest in the real world, but rather discussion about the pros and cons of stocks in which to actually invest, and over the long term.

naive, obviously. but i am finding i rather difficult to see the value in CAPS except as an exercise in becoming a short term day trader. at which i undoubtedly would not excel!
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