Now that The Motley Fool's new CAPS service has been running for more than eight months, I've started to take a closer look at how members of the Fool community are doing with their picks. Although you won't yet find TMFGalagan among the lists of player profiles, just watching how other people make their picks and how those picks perform makes for fascinating reading.
One of the interesting bits of information you can look at on CAPS is a list of players whose score doesn't necessarily reflect the accuracy of their picks. For instance, you can see players who tend to make a lot of correct picks but whose scores don't manage to make it into positive territory. Conversely, you can find other players whose scores reflect big positive results despite having picks that, more often than not, go in the wrong direction. This second group manages to find a way to win despite their incorrect choices.
What one stock can do
More often than not, the cause of such a disparity comes from the performance of a relatively small number of stocks in a player's portfolio. For instance, one player, parrantolaw, who has picked the correct direction for just three out of every eight picks, can attribute most of a nicely positive score to just two stocks: MasterCard (NYSE:MA) and International Asset Holding (NASDAQ:IAAC). Another player, EPS100Momentum, has only a 35% accuracy rating, but among almost 600 active and ended picks, a single stock, US Global Investors (NASDAQ:GROW), accounts for more than 10% of the overall score. As fellow Fool Bill Barker points out, Wall Street doesn't follow IAAC and US Global closely, but that hasn't kept them from creating big gains.
Similarly, players with high accuracy ratings but low scores can often blame their bad performance on a single mistaken pick. For example, beginning player timscanlon has correctly picked the direction for seven of nine stock picks. However, one single misstep -- a 50% drop in Tweeter Home Entertainment (NASDAQ:TWTR) -- is the sole reason behind an overall negative score. Even more experienced players, such as clanza875, with an overall accuracy of better than 63%, can point to just a handful of incorrect picks, including True Religion (NASDAQ:TRLG) and LoJack (NASDAQ:LOJN), as the primary factors pulling a score into negative territory.
One out of two ain't bad
Of course, in the ideal world, you could be like TMFEldrehad, the CAPS player who currently holds the top rating. He not only has a big positive score but also has an accuracy rating higher than 73%. Yet even he can attribute some of his performance to great calls on just two tiny stocks: a well-timed negative call on Conversion Solutions and another pan of Pegasus Wireless.
However, it's encouraging to many investors, especially those who are just starting out, that you don't necessarily have to be right every time you pull the trigger on an investment. All you have to do is to make every effort to minimize your losing positions while not being too quick to lock in a small profit on your winning stocks. As the CAPS lists show, just because you can claim a win on the majority of your investments, that doesn't mean you'll come out ahead as far as total return is concerned.
It will be interesting to continue watching as CAPS continues to build up more history. After all, less than a year's worth of results doesn't firmly establish that the top CAPS players are the masters of the investing universe. For many players who established their CAPS accounts during the summer, the stock markets have generously rewarded a huge number of bullish picks. Seeing how the current high-flying pickers fare whenever the market decides to take a turn southward will help to separate the skillful from the lucky.
Lessons to learn
You can learn a few lessons from the experiences of these investors. Although one function of a diversified portfolio is to reduce the risk that a big drop in the value of one of your holdings will have a large impact on your overall portfolio value, having more stocks in your portfolio increases the chance that you'll find that one great company that will end up contributing most or all of your investment gains. Though you may have several other stocks that remain relatively flat and therefore lessen the positive influence of that one great stock, there's no way you can foresee which of several promising candidates will be the one that takes off.
In addition, remember that investing isn't about being right -- it's about making money. You shouldn't feel particularly bad just because your stock falls by a few cents right after you buy it, nor should you celebrate if it happens to rise slightly. If you focus too much on always wanting to be right, you may end up taking a large number of small profits to defend your record of positive investments, and you may well hold onto your losing stocks too long in the hope that they will bounce back; if you do, you may allow them to magnify into bigger losses that more than outweigh the small gains on your winners. In judging the success of your investments, you should focus the majority of your attention on the magnitude of your overall gains and losses, not on whether you happen to be ahead on more stocks than you're behind.
In the end, as long as you reach the financial goals you set for yourself, it doesn't matter whether it was one stock or 500 stocks that got you there. You can't expect never to make a mistake in picking an investment, but as long as you don't let your mistakes overwhelm the correct choices you make, you can finish where you want to be.
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Fool contributor Dan Caplinger hasn't always won from his wrong moves, but he keeps getting better. He doesn't own shares of the companies mentioned in this article. MasterCard is an Inside Value pick. The Fool's disclosure policy keeps you current.
