Why Aren't We Moneyballing the Market?

Financial advisors run a very strange bazaar.

At center stage, you'll find celebrity analysts telling you to "buy, buy, buy!" lululemon athletica (Nasdaq: LULU  ) right now. There's very little discussion on what makes lululemon a buy today, but one of this showman's centerpieces is a "no-huddle offense." No time to talk -- gotta run to the next high-speed pick! (For the record, some Foolish analysts would agree with this particular call; we just explained the investment thesis in more detail.)

To the right, a major investment bank backs off a former "sell" recommendation on oil rig operator Transocean (NYSE: RIG  ) . This advice comes in the form of a research report, so there's plenty of analysis. That is, if you can get your hands on the report -- a privilege often reserved for account holders in the millionaire club. Regular investors with smaller accounts usually have to settle for excerpts in the financial press.

And it's hard to tell how sincere this analysis really is. Why did the bank build its own exposure to Transocean by 2 million shares last quarter while recommending that other investors sell it?

These stations are market movers. Major analysts or media personalities say "Jump," and the market asks, "How high?"

Out in left field, you'll find short-sellers with a profitable axe to grind. Then there are lesser pundits and well-meaning bloggers. Your email inbox fills up with "hot stock tips" and investing newsletters, some of which you don't remember signing up for. Sit down for a haircut and your barber starts to wax poetic about Apple (Nasdaq: AAPL  ) . Everybody loves the world's largest company, right?

And the beat goes on.

Some of this information overload really is based on solid research by trustworthy people. But some is just thinly veiled marketing. And the quality spectrum runs all the way to downright scams.

It's too much, yet not enough. How are you supposed to separate the wheat from the chaff in this cornucopia?

Let me sleep on it
Right now, there is no good answer to that crucial question.

In most cases, it's up to you to make a judgment call based on very little concrete information. Jim Cramer doesn't track and publish his rapid-fire recommendations, even if millions of his viewers rely on them. Very few investment banks do it, despite charging hefty fees for their services. And let's face it: Nobody will ever regulate or track your barber.

We try to help out here at The Fool. Our CAPS system is the closest thing you'll find to an honest assessment of public investment advice. When you see a strong opinion or outright recommendation from a Foolish writer, there's a CAPScall to go with it. It's how we measure ourselves against the market and other advisors.

We even keep track of banks, analyst firms, and certain media channels in the same system. Right now, Benchmark Securities is the best performer of all the analyst feeds we look at. Cramer is a decent performer and by far the most active player in our system: His 2,300 active picks dwarf the second-place profile almost three to one.

CAPS can be your map of the investment bazaar. It's a rough guide to the stockpicking landscape, and we built it to help you Moneyball the market like modern baseball coaches Moneyball their teams. You shouldn't necessarily listen to the most popular advisors available. You're far better off picking advisors based on the quality of their advice. So that's what we look at in CAPS.

But we're not perfect. It's impossible for a third party like us to track everybody all the time. Some calls fall through the cracks or are never published where we can find them. Nobody ever told media mavens or investment bankers that they have to report every pick to us. Frankly, I think a lot of them would rather not expose their performance in such broad daylight.

Come out, come out, wherever you are!
This is exactly why we need to fill in the gaps in our CAPS map (say that three times fast).

We need to hold pundits, advisors, and investment professionals accountable for the pearls of alleged wisdom they drop. I'm envisioning a public network where all financial advisors are rated, like CAPS, but with an official mandate. Call it a "credibility index" for money-management advisors or a licensing program. You can't call yourself a stock market analyst unless you submit every pick and pan to this central system, where you're measured against others and a common index.

You and I wouldn't have to guess what a "soft accumulate" rating might be, or how it compares to a "get constructive on weakness" or a simple "buy." The system would remove such nonsensical and subjective nuances.

Every new recommendation would have to be paired with the advisor's total rating. Whether it's on your TV screen, in the newspaper, or at the header of a Web page, the rater gets rated in black and white. At a glance, you'll get a strong idea of whose advice is worth something and whom you can set aside. And if there is no score, that advisor isn't worth that title. I'm not saying it should be illegal to publish financial advice without that basic stamp of approval, but investors would learn very quickly that you might have something to hide unless you're part of the network.

The SEC could do this, but laws and regulations go through miles of red tape before they can make a difference. I'd love to see the market adopting CAPS as the official yardstick to measure advisor performance. If nothing else, direct data submissions would take the load off the Fools who handle data input from various sources today.

But hey, if the investing community would prefer that Morningstar (Nasdaq: MORN  ) or Thomson Reuters (NYSE: TRI  ) do the job, it's no skin off my nose -- or The Fool's. They're fine purveyors of public data, and we'd love to help them set up their systems if necessary. What matters is that investors get access to sorely needed information -- and the sooner the better.

That's my audacious idea on how to make the market a safer place to live and invest: Give investors a surefire method to evaluate the quality of financial advice. It's a disgrace that we don't have this tool yet.

Can you come up with a better way to build a safer Wall Street? Share your thoughts in the comments below. We'll publish some of your tastiest concepts in an upcoming Fool article.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of lululemon athletica, Transocean, and Apple. Motley Fool newsletter services have recommended buying shares of Morningstar, Apple, and lululemon athletica. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (4) | Recommend This Article (7)

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 September 29, 2012, at 9:05 AM, TMFPennyWise wrote:

    You make some good points, Anders.

    Concerning the usefulness of CAPS, when a TMF staffer makes a case for a stock and then commits his opinion to a CAPs post, I find that most helpful. On the other side of the spectrum though, I find most CAPS entries by the general TMF public pretty useless.

    Concerning Cramer's opinions, did you see his 'Atonement' show (in honor of Rosh Hashanah) last week where he reviewed several of his worst picks and poor advice from the past year? Very enlightening.

    I am a SuperNova member of TMF and also an avid viewer of Cramer's Mad Money and I think both are valid sources of stock info. But the old adage holds true for both info marketers--You have to do your own homework.

  • Report this Comment On September 29, 2012, at 3:05 PM, shamapant wrote:

    http://caps.fool.com/Blogs/a-really-really-modest/2107

    http://caps.fool.com/Blogs/caps-improvements/2250

    http://boards.fool.com/suggestion-for-improving-caps-2746861...

    The CAPS system is great, but not flawless. Fool should invest some time in improving their system, and if they do this I would be a lot more on board with using it as a way to judge the reality of investors' skill.

  • Report this Comment On September 29, 2012, at 4:43 PM, neamakri wrote:

    Sounds right to me. Analysts recommendations need to be either "outperform" or "underperform" same as CAPS.

    I suggest a "batting average" like baseball. In other words a .500 average means that analyst is right 50% of the time.

  • Report this Comment On September 30, 2012, at 9:53 AM, CaleInTheKeys wrote:

    Spoke Funds, hoss.

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