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By blitzen94
November 15, 2006

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As we approach Thanksgiving I want to bow my head in acknowledgement of two things for which my portfolio is thankful:

(1) The Motley Fool CAPS service, and:
(2) The brilliant folks who determined that IRAs shouldn't be allowed to use margin.

I'm posting this on the HG Philosophy board because I think my rollercoaster ride through CAPS-land is due in large part to decisions I made that contradict some of the core tenets we discuss here. I'm thankful CAPS was there to let me see how dark the night can be without having to risk any actual capital and I'm thankful that I can't sell short in my IRA. FWIW, all of our current non-tax-advantaged investing is done through DRIPs so my opportunities to go short are nil. CAPS gave me the opportunity to give it a shot.

Here's my story...

I was a CAPS darling for a brief, shining moment. I marveled at the charms I was racking up on a near daily basis. It was like giving out stickers to a kindergartener. Magic trinkets that could affect my mood for hours. Believe it or not, I was an All-Star. And not just an 80.01th percentile All-Star but a 90+ percentile real deal. I rocked.

As I heard of more ideas I was pretty quick to expand beyond my original seven picks and I was particularly attracted to the businesses that shouldn't be in business. While I can't sell short in real life, I can definitely pick some of these LOO-sers to underperform in CAPS...and I did. But something strange happened on my way to the promised land of the 95th percentile. For some reason, my collection of the "suckiest bunch of sucks that ever sucked" [H. Simpson, circa 1999] turned into Wall Street darlings! IIG, GOOG, DRYS, CRM, TRMP? Come ON!

Here's where CAPS is highly instructive: Just as in a real portfolio, there's no limit to the damage that can be wrought by picking a stock to underperform whereas there IS a limit on how much a botched outperform can hurt you. I got to learn this painful lesson in an emotional and visceral sense yet have absolutely none of my money at stake. What a wonderful gift.

How emotional? In the past few weeks I've been stripped of many of my precious charms (presssshhhhhhioussssssssss) and become the unspeakable of the CAPS community, now dwelling in the 7th percentile as of this writing. I got rocked.

Yes, I've swung from the top decile to the bottom decile in a matter of weeks. Looking at my picks and their performance it's very clear how this happened: Incorrect picks on Underperformers. They say shorts have to be smart to succeed. Right now, I'm not smart enough for this game. But again, it cost me nothing to learn this.

The HG philosophy looks for great companies that will outperform the market. The focus is on the small cap universe but the idea is transferable to the entire market: There are traits in finances, strategy, management, leadership and greater market trends that allow investors to gauge the relative value of a company's stock and select those whose prospects are greater than their peers.

I take heart in that when I look at my CAPS selections and filter by those I bothered to research and picked to beat the market. Using what I've learned at Hidden Gems, Inside Value and TMF in general, I'm not doing so badly. Check this out:

- I've picked six stocks to outperform the market (with >7 days tallied). Four are doing so. That's a 67% accuracy rate which I'm sure would boost my score/success. Using what I know...I'm OK.

- I've picked six stocks to underperform the market. Only one is doing so. This 17% accuracy rate is a monster drag on performance. Using what I don't know...I'm getting destroyed.

Another little lesson I'm taking away from this, anecdotal though it may be, is that it's easier to find winners than it is to find true losers. While this wouldn't be true for a random sampling of stocks we are not choosing randomly. We're applying various selection criteria, researching further, and making decisions accordingly. This approach should outperform the randomness of the market and by every measure (performance of HG newsletters, my CAPS review, my actual investments) it does. I take great comfort in this.

For yet another free lesson in life, learning and investing...Thank You.

Blitzen94

- who hereby pledges to resist the urge to pick losers just because it's fun to watch them drown. All too often, they float away instead. Someday I may be ready to make a legitimate short call but I'm in no hurry.

 


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