Motley Fool CAPS started in July of 2001 as an eight-page Word document on the hard drive of inventor (and Motley Fool co-founder) David Gardner. He designed a game challenging Motley Fool community members to demonstrate their investment acumen by picking stocks to outperform or underperform the Standard and Poor's 500, with algorithms that the Fool would use to track, score, and rank the community members. But with the dramatic stock-market selloff and Internet woes of 2001-2003, the company had no resources to commit to build out the site. It wasn't until the summer of 2004 when Gardner obtained a management OK and began to work with a small team of programmers to build the CAPS prototype, while filing for patents.
The two key assets that drive CAPS are the breadth and depth of the Motley Fool community's intelligence, built up since 1994, combined with a scoring system that rejects some basic Wisdom of Crowds tenets by merit-weighting all participants and enabling them full access to each other's stock picks. By scoring members' abilities to call the direction of stocks vs. the S&P 500 over any chosen timeframe, the Fool has been able to force rank more than 100,000 stockpickers who have used the site. CAPS goes beyond just scoring stockpickers, though, to go on to rate all individual stocks themselves, based primarily on the merit of the individual stockpickers themselves. Because of the high rate of engagement and participation of the Motley Fool community, CAPS as of July 2008 had succeeded in force-ranking over 5,500 stocks, managing to cover the Long Tail of the American (and increasingly global) stock market.
In order to be considered an All-Star, one must rank in the top 20% (the 80th percentile or higher) of all rated players participating in CAPS. At the upper levels, accuracy appears to count more strongly than the number of points one has or earns.
CAPS player rating
In order to be rated, one must have at least seven active recommendations. One's rating depends both upon the number of points one has earned by making "outperform" or "underperform" calls on stocks and the accuracy of those calls.
To play, each person makes a "call" on a particular stock. That call is either "outperform" -- the stock will perform better than the S&P 500 going forward -- or "underperform' -- that stock will perform worse than the S&P 500 going forward.
At the next update to the data, that call is begun with the current stock price and the current S&P 500 price. From then on, both are tracked.
As the stock and S&P 500 prices change once a call is made, the player earns points according to the call made. The formula is:
Outperform: Points = Percent change in stock - percent change in S&P500
Underperform: Points = Percent change in S&P500 - percent change in stock
A component of the overall player rating. The call is counted as "accurate" if the points earned from the call are positive.
CAPS stock rating
In order to be rated, a stock must have at least 10 active calls, with at least one of those being from an All-Star.
David Gardner Explains
For each call, the player has an opportunity to enter a comment describing why he or she made that call. These range from a few to hundreds of words, depending on the player. Many of these pitches are highlighted daily in Fool articles.
CAPS provides a forum for players to write out their non-pitch thoughts in the form of blogs. Most of these are investing related.
Stocks within the CAPS universe are given "tags" that collect similarly themed companies together. These can be investing related such as "dividend" for dividend-paying stocks, amusing such as "Ticker is a name", or anything in between.
The Motley Fool has recently launched a still-experimental screener page in which many common financial metrics can be screened for. What sets this apart is that the CAPS rating can also be searched upon. This makes it handy to find those companies which have recently moved from 4-star to 5-star status, for instance.
The CAPS name is credited to CAPS team lead John Keeling, who saw the name as evocative both of jester caps and market caps. The name may or may not be an acronym -- it's likely at some future point we'll have a contest about that....