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 â[euro]oeCAPSâ[euro] 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 stoc...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Avery, Christopher N, Chevalier, Judith, Zeckhauser, Richard Jay
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2011
Subjects
Stock exchanges
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Summary:We study the predictive power of approximately 2.5 million stock picks submitted by individual users to the â[euro]oeCAPSâ[euro] 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.