The "CAPS" Prediction System and Stock Market Returns
We study the predictive power of approximately 2.5 million stock picks submitted by individual users to the "CAPS" website run by the Motley Fool company (www.caps.fool.com). These picks prove to be surprisingly informative about future stock prices. Indeed, a strategy of shorting stocks with a disproportionate number of negative picks on the site and buying stocks with a disproportionate number of positive picks produces a return of over nine percent per annum over the sample period. These results are mostly driven by the fact that negative picks on the site strongly predict future stock price declines; positive picks on the site produce returns that are statistically indistinguishable from the market. A Fama French decomposition suggests that these results are largely due to stock-picking rather than style factors or market timing.
We appreciate the efforts of the Motley Fool Company in making data available to us. Avery and Zeckhauser gratefully acknowledge support from the Alfred P. Sloan Foundation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- Shorting stocks with a disproportionate number of negative picks ... and buying stocks with a disproportionate number of positive picks...
Christopher N. Avery & Judith A. Chevalier & Richard J. Zeckhauser, 2016. "The “CAPS” Prediction System and Stock Market Returns," Review of Finance, vol 20(4), pages 1363-1381. citation courtesy of