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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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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, 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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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, 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.

This is so often overlooked Dave, that I just wanted to chime in and stress just how big of a factor this is going to be over time.

You are right that CAPS is just starting to mature. As CAPS goes, I've been around longer than most, and I've been playing just a bit over a year and am already seeing this. What will happen 5 years out, or 10? Those who make good outperform calls on perennial outperformers will someday be racking up 100 points a day or more on 10% stock movements. Try doing that with an underperform call!

The geeky side of me likes to think of underperform calls as the 'dark side of the force'. In the words of Yoda, in a way they're 'easier, quicker, more seductive'. Over time, though, it is the outperform calls that will prove themselves more powerful.

Underperform calls appear to have the advantage for now precisely because CAPS hasn't been around very long and everyone's CAPS pick list is filled with what are effectively short-term calls. The more time passes, the more we'll see this change.

I'm sure none of this is a new concept to you Dave, but I feel so strongly about this aspect of CAPS that I felt compelled to second your thoughts.


(a.k.a. TMFEldrehad)
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To chime in - my CAPS port is playing out right now as a poster child for patience. I just saw my score go over 80, but I've had the beanie for the better part of the last 6 months.

I have a sector oriented port - so it's just going to be out of favor from time to time. The internal benchmark I have in the port (an ETF - PBE) is a significant laggard. Yet good companies that I've held when they were down are rising, and my score with them - GE, LLY, CVS - all were anchors at one point, but now are breaking past the S&P.

I don't own many of my CAPS picks, my real life port will never be that over allocated to one sector (even healthcare). But I do own 2 of my 3 worst CAPS picks, and would buy them again today (and the third worst in appealing as well).

Patience is paying off for me in CAPS - nice lesson.

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There does seem to be a teeny bit too much emphasis on reverse-engineering the scoring mechanism to outwit the CAPS "gamers", rather than genuine stock picking for real $ investors. I really can't imagine Buffett or Lynch playing this game.
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Lesson 6: I have had some of my best scores from calling outperforms on cheap stocks.
Lesson 7: Sometimes the cheap stocks have just had a run-up unjustified by the financials and are backing off to a reasonable valuation. If its a good company, call an outperform when the stock price drops and watch the score soar.

I find the value in CAPS is as a teaching tool. Sure, I could probably get the highest scores by calling primarily underperforms and few outperforms, because there are more turkeys than good companies. But the value of CAPS is in learning to tell the difference.

Recently, I haven't been bothering to make calls on companies that already have large numbers of calls unless I really like the company. I try to find one-star companies that I think will outperform, five-star ones that I think will tank and unrated companies.

I try to pick cheap companies because that is the point where I want to learn to find the 10-baggers. I just watched one of my outperforms go from $1.98 to $.26 (splat!). Now I am watching if the company will go under, and analyzing where I went wrong.

I just ended 40 picks that I realized were started at an unjustified price and am restarting them when and if I like the price for the call.

I would never use the approaches I use in CAPS in real life because my strategies are experimental and for learning to evaluate companies. I short in CAPS and not in reality because I need to evaluate why I think a company that interests me will not outperform. I will call an outperform on a company that I wouldn't consider investing in because I first need to learn how to evaluate an early stage company. When I am satisfied with a call, I follow it long-term. I don't get the best scores, but my real-life portfolio is looking better than when I first started.
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