(This post has very little to do with real investing.)
For some reason, I’ve been obsessed with beating Motley Fool’s stock picking system. I’m interested in beating it as an intellectual challenge and am not aware of any meaningful prizes. Motley Fool’s CAPS lets you pick up to 200 stocks and you get ranked based on how those stocks perform compared to the S&P 500. Unlike other stock contests, you are rewarded for diversification.
Normally in a stock contest, my strategy is to go for a portfolio with extreme concentration, correlation, and volatility. This greatly increases my chances of winning. It works. (Unfortunately at wallstreetsurvivor.com, I forgot to claim my prize one time.) This kind of strategy would still work in CAPS because you could setup multiple accounts and short bull or bear leveraged ETFs. But I want to make life difficult for myself and do things the hard way: only use one account.
So here’s my strategy
- Short leveraged ETFs. It’s easy money in a stock contest because you don’t have to worry about the mechanics of the borrow. (In my real life portfolio, I am not shorting any leveraged ETFs.) I’ve written about the perversity of leveraged ETFs in the past.
- Short awful stocks… especially stuff that I wouldn’t short in real life. For example, STP has borrow costs of around 100% annualized (several times credit card debt…!). On CAPS, you don’t have to pay the borrow fees! So you can short trash like this with impunity. One lazy way of finding trash is to screen for stocks with short interest above 20%. (In real life, you should probably avoid heavily shorted stocks unless you are buying cheap put options on them.) Another method is to go to secfilings.com and to short all the advertisers on that website (unfortunately many of them aren’t allowed in the CAPS system). I am sure there are other ways of finding trash companies but I’m not going to put in the effort.
- Be like Jim Cramer and do the lightning round. I want to fill up all of the 200 picks, so I make snap judgements on companies that I know little about. Baidu? Looks GARPey! I’ll throw it in!
- Churn the winning positions. Because CAPS rewards you for accuracy, it makes sense to close and reopen winning positions with >5 score.
- Churn short positions. Suppose that a short position goes down 50%. In CAPS you would get 50 points added to your score (assume that the S&P 500 stays flat). If the short position goes down another 50%, you would only get 25 points added to your score. If you had instead closed and reopen the position, you would get 100 points added to your score instead of 75.
None of these strategies are particularly new or innovative. Many of the top players on CAPS are shorting leveraged ETFs. TMFStockSpam shorts pump and dump penny stocks and is one of the top players on CAPS.
Here is my CAPS webpage:
Let’s see if I can game this system.