Strategy

My strategy over the next six months will be simple: attempt to find good businesses whose stock is trading at reasonable prices, making them well-positioned to beat the overall market averages. I may choose to throw in a few shorts, too, on stocks I think are overhyped, overvalued hunks of junk.

Easier said than done, I know, but I’ll have the help of tens of thousands of hobbyist and professional investors who use the CAPS stock-rating system. They will be feeding me information, sharing their insights and opinions, and telling me which stocks they think are poised to provide stellar returns.

During a recent round of Strategy Lab, Ken Kam used what he calls his m100 -- 100 of the top performers at Marketocracy.com. The idea of harvesting community intelligence from thousands of people is a fantastic one, and one that is also utilized in CAPS.

Reading the ratings

One of the beauties of CAPS, for me, is that CAPS ranks investors as well as stocks, with better-performing investors influencing the stock rankings to a greater extent than lesser-performing ones. CAPS is still relatively young, but early indications are that the stock ratings generated by CAPS -- from one to five stars -- do matter. Five-star stocks, as a group, perform better than four-star stocks; four-star stocks outperform those with three stars.

This doesn’t mean I’ll limit myself to bullish calls on stocks rated five or bearish calls on stocks rated one. Sometimes I like to go against the grain -- like the time I made a bullish prediction on Dell Inc. (DELL, news, msgs) when it sported a lowly one-star stock rating. When I do, I’m going to want to have a really good argument as to why I think the hundreds of investors I’m betting against got it wrong.

The star ratings, while important, are just the beginning. Over on CAPS, players constantly are making pitches -- comments of varying length as to why they think a stock is a rocket or a dud -- and writing blogs. In a community tens of thousands strong and growing, no matter what subject you're interested in, you can find some very insightful comments made by true experts in their respective fields. The hands-down best analyses of the subprime-mortgage mess I’ve read have been posted in blogs by CAPS players who are intimately familiar with the industry, including some who work in it every day.

Analyzing companies and picking stocks poised to generate market-beating returns over the long haul isn’t always easy. Heck, it’s never easy. After all, nobody can be an expert on every industry, segment or sector. My own independent thought and judgment will always play the primary role in my decision-making process, but by harnessing the collective intelligence of tens of thousands of people on CAPS, I’m sure I’ll make ultimately better investing decisions than if I tried to go it alone.