Wednesday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Wednesday's biggest winners among the stocks with a top rating of five stars.

Without further ado:

There's a reason I selected notable five-star gainers, as opposed to other big-name winners making noise on Wednesday, such as one-star homebuilders Lennar (NYSE:LEN) and Centex: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its market-beating prowess: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, 99% of the 1,221 CAPS All-Stars who've rated Berkshire Hathaway's B shares have a bullish opinion of the stock.

Last week, CAPS All-Star saunafool explained why Warren Buffett's brainchild is an exceptionally timely bet:

When there is blood in the streets, particularly financial blood, I have more faith in this team to pick up the true value than anyone else out there.

And guess what? They have a huge pile of cash to go bargain shopping with. I bet some of the Wall Street financial fancy pants wish they had saved up some of that old fashioned cash instead of leveraging themselves into oblivion.

Of course, consistent with that call, shares of Berkshire moved higher yesterday after Buffett announced that he'll buy a significant stake in Wall Street investment bank Goldman Sachs (NYSE:GS).

The bullish lesson?
When times get tough, the best investment you can make is often in the best investors. As CAPS' saunafool understands, brilliant capital allocators thrive on major downturns, so it's never a bad idea to let them do the bargain-hunting for you. As Buffett, himself, famously said:

Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. ... [W]e never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are five of Wednesday's biggest one-star decliners:  

Although yesterday's drop in highly rated CapitalSource (NYSE:CSE) may have caught our community off guard, one-star stocks are fully expected to fall hard: Since CAPS started, one-star stocks have dropped by an average of 11.4%, annualized.

Did CAPS call the fall?
Last month, for instance, CAPS All-Star deepakshenoy shared some bearish thoughts on Ambac Financial:

Regardless of the S&P stay on the rating, [Ambac]'s going to find the going tough. Muni bonds are hurting two ways: either not opting for insurance or if they have insured, are close to default. [Credit default swaps are] a tough area -- [Ambac has] probably written a lot of the upper grades of [collateralized debt obligations] too and it seems Alt-A is the next subprime so that is going to hurt too. Lastly they are going to find the lack of [an] AAA [rating] a serious problem for income going ahead.

Shares of the troubled mortgage insurer are already down 49% since that call.

The bearish takeaway?
Always identify a stock's risk exposures before they come back to hurt you. By maintaining an independent thought process, and keeping a razor-sharp focus on a company's fundamentals, you can prevent yourself from taking bad, long-shot bets no matter how tempting they might be. As Benjamin Graham said, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

The final Foolish move
Investors often focus strictly on stock price movements without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, thousands of investors are Foolishly sharing insightful investment tips to help, above all else, identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you become a more Foolish investor.

Log in to CAPS today, and start participating. It's absolutely free -- and a lot of fun!