Who Is the World's Smartest Investor?

Remember "Deep Blue"? This chess computer famously defeated world champion Garry Kasparov in 1997. Today, Deep Blue has a much broader significance to me and many of my fellow investors. In fact, Deep Blue means more to you than you may realize.

Deep Blue is how you beat the market.

The pieces are stacked against you
Let's step back for a moment, all the way to May 1997. Reigning world chess champion Kasparov is defeated in a six-game match by an opponent whose playing strength, in the words of Wikipedia, was mainly "brute force computing power."

Deep Blue, built by IBM, brought its 11.38 gigaflops of calculating power -- along with some guy in spectacles pushing pieces around -- to the table. The headlines soon read: "Machine Beats Man." It was the first time under standard tournament chess rules that a machine took down the world's best chess player.

As I start to explain how Deep Blue will help you beat the stock market, let me ask you this: Had a machine really beaten the man? I don't think so. Forget the headlines. Concentrate instead on the particulars of the situation.

A whole bunch of IBM programmers, teaming up with a gaggle of grandmasters, worked together to program the machine that beat the man. It wasn't really a story of a machine winning. It was a much simpler story, the sort that plays out on the proverbial unsupervised school lot: A bunch of bullies ganged up on one geeky guy and knocked him down. It was a completely unfair match.

At The Motley Fool, we're quite aware that investing isn't a fair match, either. People who go it alone -- even the grandmasters -- are increasingly in deep trouble. That's exactly why we're aiming to be the bullies.

We believe that by working really hard as a community -- together -- we will ensure that we all arrive at better information, deeper insights, broader perspectives, and bigger profits than a single mom-and-pop investor, or a single Wall Street analyst, or even an entire hedge-fund research team. We are building a new model for research that brings together tens of thousands of people, not one lone analyst.

The pawn stands alone
Do you still invest by yourself? Are you quoting your portfolio, reading your 10-Qs, checking the stock charts, keeping a journal, typing it all into Quicken, and tracking your performance ... alone?

Rather than settle for solitude, why not add your efforts to our community intelligence and reap the benefits of what we have to offer?

Members of our 170,000-person-strong CAPS investment community pick whether they think a stock will outperform or underperform the market. Our proprietary CAPS algorithm then rates those stocks on a scale of one to five stars, weighted by each member's stock-picking ability.

To date, CAPS has a great record of achievement:

Stock Group

Return

Five-Star

30.9%

Four-Star

21.5%

Three-Star

9.9%

Two-Star

(5.3%)

SPDRs

(9.8%)

One-Star

(48.4%)

 

Source: Internal data from Dec. 29, 2006 inception to Dec. 31, 2010.

By combining our knowledge, CAPS members managed to avoid some of the biggest recent blowups. For example, members indicated at the start of 2008 that they had little confidence in Washington Mutual, General Motors, Fannie Mae, and many other blowups by giving them one-star ratings. Conversely, top performers like Bucyrus and Atheros Communications (Nasdaq: ATHR  ) were rated five stars at the time. Today, CAPS players remain bullish on these two companies, awarding them five- and four-star ratings, respectively.

So what companies are CAPS players wary of and bullish on today?

The following stocks are currently just rated as one star. Here's why:

  • Tesla Motors (Nasdaq: TSLA  ) -- Unprofitable, faces stiff competition from larger auto makers' plug-in models.
  • St. Joe (NYSE: JOE  ) -- Skepticism about the valuation of the company's properties.
  • Vonage (NYSE: VG  ) -- Difficult competition from Verizon, Comcast, and Skype.

Conversely, CAPS players are bullish on these five-star stocks:

  • Ebix (Nasdaq: EBIX  ) -- High margins and growth, wide market opportunity in insurance IT.
  • Sysco (NYSE: SYY  ) -- High moat business that generates strong cash flow.
  • Infinera (Nasdaq: INFN  ) -- Strong technology and long-term Internet growth opportunity.

It takes a village ...
If you take away just one thing from this article, let it be this: Investing should not be a solo venture. Going it alone might just make it harder than it needs to be.

So I encourage you to get your family involved. Get your friends to help you cover public companies -- and reciprocate the research for them. Join an investment club, or come check out CAPS. Find a discussion board where you can share thoughts and analysis with like-minded investors. Remember the power of Deep Blue.

When you get the benefit of interactive, community-based research -- which draws doctors, techies, homemakers, accountants, mallrats, and investment junkies of all shapes and sizes -- you will operate like a good venture capitalist. Like them, you'll get in front of "deal flow" and locate the best companies, because like them, your information is simply better.

Think of your portfolio as a chess computer. You want as many people -- as many expert insights -- as possible programming your portfolio.

Next week, we're reopening our Motley Fool Pro service to new members. This real-money portfolio service has invested $1 million of real money in a portfolio designed to make money in any market using long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

This article was originally published under the headline "Deep Blue" on Aug. 8, 2006. It has been updated.

Motley Fool co-founder David Gardner owns shares of Ebix. Sysco is a Motley Fool Inside Value recommendation. Ebix and Infinera are Motley Fool Rule Breakers picks. Atheros Communications is a Motley Fool Hidden Gems selection. Sysco is a Motley Fool Income Investor pick. The Fool owns shares of Atheros Communications, Ebix, and Infinera. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2011, at 10:00 PM, mshipe101 wrote:

    Wi$dom of the ma$$e$

  • Report this Comment On January 15, 2011, at 11:28 AM, dgroves0 wrote:

    David Gardner, is it possible that I see ANOTHER Motley Fool article that uses Vonage as a poster child of a bad investment? From the grand Fool himself?

    Looking at your chart, I see the market made a turnaround about March 1st, 2009. about 21 months ago.

    Vonage Low of the day on March 2nd was $.31

    http://stockcharts.com/h-sc/ui?s=VG&p=D&yr=1&mn=...

    Vonage High of the day on January 13th 2010, three days after you printed that article, Was $3.38

    A 1091% increase - A ten bagger - all while rated as one star

    Things have changed since those one star ratings were bestowed and never looked at again

    New management

    Profitable quarters

    New products and services

    New debt restructure at less than one half of the previous interest rate.

    Analyst Earnings estimate of $.25 - 2011

    Quality of service raised

    Churn Reduced

    Added customers the fourth quarter

    $40Million+ EBIDTA per quarter

    $20 million plus Free cash flow per quarter

    New products - plan to monetize 2nd half - check

    New services - plan to monetize 2nd half - check

    Infrastructure in place to handle new services - check

    Plan to continue to expand globally - check

    Great new management performing - check

    "Surprise" loan writedowns gone forever - check

    This is not the company it was 2 years ago, but it seems niether you or anybody else has even looked at where it really is.

    It's closest competitor for comparison is EGHT - Rates Four Stars - Lets see what their comparison ratios look like:

    VG

    Ent Val/Rev (ttm) 0.62

    Ent Val/EBITDA (ttm) 3.81

    Price/Sales (ttm): 0.55

    Rev Per Share (ttm): 4.32

    EBITDA (ttm): 144.59M...(Per Shr _ .65) (221m shr used)

    Operating Cash Flow (ttm): 197.09M...(Per Shr _ .89) "

    Levered Free Cash Flow (ttm): 113.20M...(Per Shr_ .51)

    EGHT

    Ent Val/Rev (ttm) 2.24

    Ent Val/EBITDA (ttm) 24.59

    Price/Sales (ttm): 2.51

    Rev Per Share (ttm): 1.04

    EBITDA (ttm): 6.01M...(Per Shr _ .10)

    Operating Cash Flow (ttm): 6.42M...(Per Shr_ .10)

    Levered Free Cash Flow (ttm): 3.18M...(Per Shr _ .05)

    TIME TO RELOOK AND REVISE - None of your other stocks mentioned were a ten bagger in the reset period!

  • Report this Comment On January 15, 2011, at 12:49 PM, dgroves0 wrote:

    Here is a comparison chart of Vonage to your 5 star stocks over the last 2 years:

    http://finance.yahoo.com/q/bc?t=2y&s=VG&l=on&z=l...

    Here are the current comparison ratios:

    VG - PPS $3.18

    Ent Val/Rev (ttm) 0.73

    Ent Val/EBITDA (ttm) 4.52 *

    Price/Sales (ttm): 0.76

    Rev Per Share (ttm): 4.32

    EBITDA (ttm): 144.59M...(Per Shr _ .65)

    Operating Cash Flow (ttm): 197.09M...(Per Shr _ .89) "

    Levered Free Cash Flow (ttm): 113.20M...(Per Shr_ .51)

    EBIX - PPS $24.94 - .............................8x Vonage

    Ent Val/Rev (ttm) 6.86 ...........................9x Vonage

    Ent Val/EBITDA (ttm) 15.35 ************..3.4x Vonage

    Price/Sales (ttm): 6.66 ..........................8.7x Vonage

    Rev Per Share (ttm): 3.71 ......................0.82x Vonage

    EBITDA (ttm): 57M...(Per Shr _ 1.67) ....0.39x Vonage

    Operating Cash Flow (ttm): 45M...(Per Shr _ 1.28) "...1.4x Vonage

    Levered Free Cash Flow (ttm): 47.15M...(Per Shr_ 1.34)..2.62x Vonage

    Ent Val/EBITDA shows Vonage should be selling at 3.4x PPS

    Is EBIX overvalued or Vonage undervalued?

    SYY - PPS $30.45 - ................ ..............9x Vonage

    Ent Val/Rev (ttm) 0.52 ........................0.71x Vonage

    Ent Val/EBITDA (ttm) 8.31 ************....5.0x Vonage

    Price/Sales (ttm): .2.42 ...........................3.2x Vonage

    Rev Per Share (ttm): 4.36 ....................1x Vonage

    EBITDA (ttm): M...(Per Shr _ ) 2.49B ....17.3x Vonage

    Operating Cash Flow (ttm): 1.07B...(Per Shr _1.82 ) .....2.04x Vonage

    Levered Free Cash Flow (ttm): 640.38M...(Per Shr_ 1.09) .....2x Vonage

    Ent Val/EBITDA shows Vonage should be selling at 1.8x PPS

    Is SYY overvalued or Vonage undervalued?

    INFN - PPS $10.62 - ..........................3.34x Vonage

    Ent Val/Rev (ttm) 1.9 .........................2.6x Vonage

    Ent Val/EBITDA (ttm) -22.84 *********....Negative

    Price/Sales (ttm): ..............................8x Vonage

    Rev Per Share (ttm): .........................8x Vonage

    EBITDA (ttm): - 35.27M...(Per Shr _ )...........Negative

    Operating Cash Flow (ttm): 20.91M...(Per Shr _ ) ......0.21x Vonage

    Levered Free Cash Flow (ttm): - 43.2 M...(Per Shr_ ) Negative

    No Ebidta, What are they thinking?

    Is INFN overvalued or Vonage undervalued?

    TIME TO REVIEW VONAGE! NOT A WHIPPING BOY ANYMORE!

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