I’ve been pretty busy recently with various thing and haven’t had a chance to update much. I have been redoing the back end of the portfolio tracking system though to handle a lot of portfolios rather than just my real money account, that way I can track multiple test portfolios and perhaps put up a simple interface for others to create their own as well. It’s not quite done though which is why it hasn’t updated my graph or holdings in the last few days.
Along with that I am going to move the CAPS testing portfolios to this site and automate the task of updating it weekly. As you may have noticed, I have fallen a little behind updating the portfolio on the CAPS website. Still though it appears to be handily beating the market with a relatively diversified set of holdings. With my last update I also added a few bear recommendations using the same ratings differential logic (but using a negative differential) to test a short selling application of the idea. It appears to have exceptionally high accuracy (70-75% depending on how you measure it) in determining short term movements which is a bit unexpected since I am looking for long term valuation mistakes rather than any sort of momentum. It could be a sign that I’m just getting lucky or perhaps the differential is more an indication of momentum than I thought originally.
I hope to have the enhanced portfolio system up and running soon, until then you’ll have to use your imagination!
I have finally setup a system to find the stocks that have the highest ratio of All-Star recommendations to total recommendations as defined in my first post here. It takes periodic samples of the ~3000 stocks with more than 50 ratings from the CAPS website and allows me to run the necessary calculations.
For the first week I changed the math slightly to use the difference between the ratios instead of the ratio of the ratios between All-Stars and the total population. I think this way it is a bit more reflective of what I was trying to accomplish in finding the stocks where the smart money disagrees with the average money most drastically. I ran the numbers and found the top ranked stocks then setup a separate account on CAPS to record my predictions. You can see a list of the current stocks I am predicting to be undervalued in a table lower on that page, as well as their price movement since I predicted them. Every week I will adjust the account to reflect the new top ranked stocks if there are any differences. As time progresses and I add more predictions these tests should provide pretty accurate results of my ranking mechanism; the error margin is still really high, but so far it has climbed ahead of the S&P 500 by 2% in a week!
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I’ve been playing with The Motley Fool’s CAPS website for awhile (and doing quite well). It attempts to combine the knowledge of tens of thousands of investors with a fancy algorithm to find the best stocks. After running its calculations, it gives each stock a rating from 1 to 5 stars proportionate to how well it is expected to do in the future. I read an article (I couldn’t find the link) by a Fool writer who had run some statistics on the CAPS database to evaluate how effective it has been in the past.
They showed that 5-star stocks had averaged a 28% return, nearly 3x the market average for the same time period. That sounds impressive, but it is a bit misleading. You couldn’t have bought those stocks then since you didn’t know what their rating was going to be a year later. Since their algorithm weighs the opinions of better performing players higher than lower performing players, there is a natural bias for stocks that have performed well in the past to be rated higher than stocks that haven’t since players that rate it highly will have performed better and their rating will be worth more. What would have been interesting is the average return of a portfolio that bought stocks when they became 5-star stocks and sold them when they lost the rating, unfortunately they keep their database private so we can’t find out.
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