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Faculty Research Working Paper Series
Christopher Avery
Roy E. Larsen Professor of Public Policy
phone: (617)496-4063
fax: (617)496-5960
The "CAPS" Prediction System and Stock Market Returns
Avery, Christopher, Judith Chevalier, and Richard Zeckhauser. "The "CAPS" Prediction System and Stock Market Returns." HKS Faculty Research Working Paper Series RWP11-028, July 2011.
Abstract
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.
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