What's it like to be trouncing the market while picking better stocks than 99% of your fellow investors? I was able to pick the brain of DatabaseBob over the weekend. At one point last week, he was the second-highest-ranking player out of more than 7,000 active participants in the new Motley Fool CAPS stock rating service.
In an interactive feature that allows you to compete against individual investors as well as some of Wall Street's biggest celebrities, Bob is clearly doing something right. I was hoping that a little insight would help me improve my own score.
Rick Munarriz: Bob, you've clearly done well in CAPS. You have more than 100 active ratings. In the real world, how many stocks do you feel comfortable owning at a time?
DatabaseBob: I currently own about 40 stocks and another eight mutual funds. I can envision maybe 50% more, but that would be about my limit. I don't know as many details about my stocks as many Fools would, so diversification is important to mitigate the effects of my inevitable mistakes. I often do a bit more analysis before I make a real-world buy or sell decision than I do for CAPS, but will typically only do a really detailed analysis if I'm concerned that I've made a mistake.
Rick Munarriz: And getting back to CAPS, do you think it's possible to follow all 109 of your active picks?
DatabaseBob: I track roughly 500 stocks in a spreadsheet using Value Line estimates to give me a sense of whether the current price is fair. It is a superficial analysis, but it seems to yield accurate results. I'm still refining my model. So, I follow the 109, plus many more, but only superficially. I can only say a little bit about each stock. But I think that the little bits I can say are well-chosen, important little bits.
Rick Munarriz: You have singled out blue chips and small caps -- value picks and growth stocks -- in the CAPS game. Do you have a preference in real-world investing?
DatabaseBob: I think it's important to balance (and re-balance) large and small, growth and value in one's real-life portfolio, and I organize my holdings into Morningstar-like "quadrants." I like to jokingly refer to "international" as my fifth quadrant and REITs as my sixth (but REITs have a smaller percentage than the other five, which are pretty evenly balanced). I should own bonds, arguably, but I've always preferred equities' extra return. Maybe when my hair gets grayer, or finishes falling out .
I used to rely more on mutual funds for my small-cap holdings, with some additional ideas from Value Line. But now I subscribe to Hidden Gems and Rule Breakers and most of my new small-cap ideas are from The Motley Fool. I personally don't have a small position in each recommendation, but I wouldn't try to talk someone out of that approach, if it is what he or she felt most comfortable with. I am pretty selective in what I choose to buy - I own seven out of 46 Hidden Gems and seven out of 37 Rule Breakers. Two of my Rule Breakers -- Vertex Pharmaceuticals (NASDAQ:VRTX), based on SG Cowen research, and Headwaters (NYSE:HW), based on Value Line -- and one of my Hidden Gems, II-VI (NASDAQ:IIVI), based on Value Line, were bought before TMF recommended them to me. I would own one more Hidden Gem if TransMontaigne was still independent. A couple of my HGs and RBs are on short leashes currently. I still rely on mutual funds for my international and REIT holdings.
Rick Munarriz: You're a fan of Value Line. Are there any other resources you use to arrive at your selections?
DatabaseBob: The Motley Fool, of course! The boards rock, and extremely informed investors lurk all over the place. Ask an intelligent question -- or even a dumb one -- and you'll be amazed at the response. I also look at Yahoo! Finance (Major Holders, Insider Transactions, Headlines, Technical Analysis) and sometimes SEC filings when I feel as if I need a lot of detail. I still subscribe to Barron's, but only skim it these days. I used to read it more thoroughly, but that time is spent reading the Fool boards now.
Rick Munarriz: Nearly 20% of your CAPS ratings are for stocks that you feel will underperform the market in the future. Do you short stocks in real life or are you simply living vicariously bearish on some of these companies through CAPS?
DatabaseBob: I've never shorted a stock in real life. I worked as a database techie at various firms on Wall Street for a decade and a half. During that time, compliance rules prevented me from shorting. So, there is certainly a vicarious element, as you suggest, but I'm also using CAPS as a playground to get a sense of whether I could be successful at shorting, now that I'm no longer under restrictions. Time will tell. Already I get a sense that shorting requires more analysis than the mostly superficial stuff that I do.
Rick Munarriz: You feel that Wild Oats (NASDAQ:OATS) will lose to the market over the next year, yet you don't have a public rating on Whole Foods Market (NASDAQ:WFMI). I would think that if you were bearish on Wild Oats, you would either be bearish on the sector or bullish on the larger Whole Foods gobbling up market share. Any reason why Whole Foods isn't on your radar one way or another?
DatabaseBob: I think that Whole Paycheck . oops, I mean Whole Foods . is a great company. I go there for lunch sometimes and will often do some additional shopping (organic groceries and vitamins) when I'm there (there are less expensive alternatives, but if I'm already there . and it's good for me .). Whole Foods, the stock, is definitely on my radar, and I would be far more inclined toward overperform than underperform. My present concern is valuation; it may appear in my CAPS portfolio at some point, but I need to wait for prices I feel comfortable with. I feel badly about my underperform on Wild Oats because they're based in Boulder, Colorado, where I live. But I think their execution is subpar compared to Whole Foods and that their market valuation is just a bit too high at this juncture. I have it marked for a one-year time frame, but maybe I should have said a shorter period. I definitely feel more jittery about my underperform positions. But during that crazy first weekend when I entered over 80 CAPS positions, including the one-year underperform on OATS, I didn't realize how the underperforms would jangle my nerves.
Rick Munarriz: You have obviously spent a lot of time molding your CAPS portfolio. Do you have any tips for those just starting out in the game?
DatabaseBob: "Everything you do matters. Choose thoughtfully." When I wrote that, the intended context was life in general, but it certainly applies to CAPS. I guess that I would add that high accuracy is probably tougher to maintain than score, so people just starting should begin with what they're really sure about and expand from there as they feel more comfortable. I think my situation is fairly unique - I've been refining my spreadsheet for a couple of decades, so someone just starting would find that difficult to replicate. Still, TMFEldrehad has likened CAPS to a marathon with no end. So the head start of the current leaders will lose significance as time goes on. Pace yourself accordingly.
Rick Munarriz: As you play CAPS, there are several graphical charms that you can unlock based on performance and investing strategy. You have collected several. Is there one that you are the most proud of?
DatabaseBob: That would have to be the "Most Helpful Pitcher" charm. I try to be a helpful poster, in general. I am actually a little embarrassed at how few pitches I've taken the time to write. I think I've gotten greedy because of my (probably temporary) high standing, and I've put more energy into increasing the volume of my picks in an attempt to improve that standing. At some point, I hope to be making and closing picks far less frenetically than today, and I hope to write more pithy pitches. Near the top of my CAPS wish list is a way to supplant my old pitch with a new one; I agree with the accountability goal of keeping the old pitch available for all to read in perpetuity, but I'd like to update my thinking periodically (quarterly?) for everyone to see. Replying to my original pitch (or someone else's pitch) buries the opinion a little too deeply, in my opinion. I was proud of my Pioneer charm too, but unlocking that one was temporary.
Rick Munarriz: In playing CAPS you are prompted to pick a time frame for your call to materialize. There is no "in perpetuity" option, but if I were to ask you which of your CAPS picks would be a lifer -- with no chance of hitting the "end position" button -- what stock would that be and why?
DatabaseBob: Wow! You saved the toughest question for last, didn't you? I'm tempted to cop out and say that such a choice is impossible. CEOs come and go, and some of them are corrupted by power. Many of the best small-cap choices get gobbled up by a larger company -- then what? But Fools know these things and yet the question was asked anyway. So, I'll say Intuitive Surgical (NASDAQ:ISRG). They have room to increase their penetration of the market for surgical-assisted robotics. Additionally, the market for supplies for those robots (like the razor and blade analogy) is already starting to make a contribution. Doctors are discovering more and more surgical procedures where the robot can improve surgical outcome because it can be less invasive than traditional procedures. Intuitive's patent moat seems insurmountable and defensible. The current valuation is rarefied, but so is the potential for decades of growth. Outstanding! A good runner-up would be II-VI (pronounced "two-six"), a supplier of high-quality laser optics. It is my belief that we will be using lasers for a lot more applications in the future than we are today, and II-VI is well-positioned and seems to be well-managed. Do I really need to disclose that I own shares in both? Of course I own them!
Rick Munarriz: Thank you, Bob!
You can join Bob and nearly 7,500 other investors like you on Motley Fool CAPS, a new community-driven experience where individual investors pool their knowledge to seek out stock ideas. Are you up for the challenge? Go ahead and give it a shot .
Intuitive Surgical, Vertex, and Headwaters are Rule Breakers newsletter recommendations. Whole Foods Market is a Stock Advisor selection. II-VI is a Hidden Gems gem.
Longtime Fool contributor Rick Munarriz believes in taking chances to earn superior returns. He does not own shares in any of the companies in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy .
