An Early Prediction of the Subprime Explosion

I'm not going to tell you how much respect I have for Fool co-founder David Gardner's investing prowess. I don't think I have to. On the front page of Fool.com, you can see that since David and his brother Tom launched the Fool's flagship newsletter, Stock Advisor, in early 2002, they've beaten the S&P 500 by a sound margin. On top of that, the Rule Breakers service David heads up has also beaten the S&P since its inception.

OK, I lied. I've told you a bit about what I think of David as an investor.

Slammin' the subprime
That said, it's no surprise that David has made some great calls in his stock-picking career -- such as singling out NYSE Group (NYSE: NYX  ) for Rule Breakers subscribers last February.

More recently, though, David made a great call in his portfolio on The Motley Fool's CAPS investing service. On Feb. 9, he gave a big red thumbs-down to New Century Financial (NYSE: NEW  ) , Accredited Home Lenders (Nasdaq: LEND  ) , and Novastar Financial (NYSE: NFI  ) . That same day, New Century and Accredited both closed down 5%, and Novastar was down 11%.

Not a bad first day. But the calls have only gotten better, as the subprime market seems to be folding faster than Johnny Chan after being dealt a 2-7 offsuit. Accredited is down 83% since Feb. 9, while Novastar has lost 81%. New Century, which announced yesterday that its creditors had cut off its funding and that it is facing allegations of default, has hit a free-fall and is down 91.4% since David tagged it.

Impressive, no?

There's a but
That's right, there's more to this story of reveling in the demise of the subprime lenders. As with all investing decisions -- real or in CAPS -- David had to make the final decision to pull the trigger on the subprime crew, but he learned of the sector's impending doom before the crash occurred.

While perusing CAPS, David happened on a blog post from Steve819, a player ranked in CAPS' top 100. Steve's post, which said "it's always been a lending bubble, not so much a housing bubble," connected with David and gave him the idea to "short" the three subprime players.

Now, that's all well and good for David, but what's even better is the fact that the other 24,207 players who have joined CAPS had access to David's portfolio and could see the moves he made. What's more, they could read David's reasoning behind the call:

"Sub-prime lenders are starting to get hit between the eyes. Too many mortgage loans made to too many people who couldn't afford them. As a smart guy I met named George Haywood once opined, loan officers were getting compensated and incented to loan loan loan with diminishing discipline, and that contributed to the real estate boom."

About a month after the call, David put up a blog post of his own:

"I have to credit Steve819 and his insights with initially raising my awareness here, which catalyzed me to move. To me, this is exactly what Motley Fool CAPS is all about. Clicking around, tracking smart people, reading and learning, making accountable calls of your own -- and, as is demonstrated very clearly here, helping the community toward better thinking and better rating of stocks."

So it's not zero-sum?
Though the stock market is decidedly not zero-sum, the investing community can sometimes seem very much so. The fact is, when it comes to the constantly churning market, there are always new opportunities that appear on the one hand and dangers that crop up on the other.

Wall Street, hedge funds, and mutual funds, among others, are throwing around big bucks to identify these red and green lights and take advantage of them. At the Fool, where our goal is to provide the best venue for investors to help other investors beat the market, we have CAPS, an army of investors 24,000 strong helping each other parse what's going on in the market.

While CAPS is not a shortcut to beating the market -- there's no such thing, no matter what those spam emails tell you -- it is a great diligence tool and a way to take advantage of the ideas and knowledge of a massive group of investors. Talk about grid computing!

If you're already part of CAPS, keep adding to the great community intelligence. If you're not yet part of CAPS, click on over and get yourself signed up -- it's completely free and provides you with community ratings for over 4,000 stocks.

More CAPS Foolishness:

Fool contributor Matt Koppenheffer made a thumbs-down call on Impac Mortgage, but missed all the really good fun in New Century. He does not own shares of any of the companies mentioned. You can see Matt's CAPS page here, or check out his CAPS blog here. The Fool's disclosure policy keeps the community more friendly than an episode of "The Brady Bunch."


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