‘Moneyball’ strategies similar to some investment approaches

In late September, “Moneyball,” hit the big screen. The movie is based on Michael Lewis’ book, “Moneyball-The Art of Winning an Unfair Game,” about Major League Baseball’s Oakland Athletics and its general manager Billy Beane’s strategy to use statistics to create a winning baseball team on a low budget.

The Athletics competed with the large market teams like the New York Yankees and Boston Red Sox, which on occasion spent more than three times what Oakland spent on its player salaries.

Beane and the Athletics came up with statistical measures to find undervalued players who could produce wins. They used a new breed of statistics called Sabermetrics, which was invented by Bill James.

SPONSORED CONTENT

Business Cares: May 2024

As Mental Health Awareness Month unfolds in Colorado, it serves as a reminder of the collective responsibility to prioritize mental well-being.

This statistical analysis went against the long-standing methods of analyzing players by using scouts to find the best players and relying on batting average, stolen bases and runs batted in. The Athletics used on-base percentage and slugging percentage to better evaluate players and try to find the players who could produce more runs and thus more wins. The team was extremely successful by winning more games per dollar spent than most, if not all teams in baseball. More than a few teams have also adopted this philosophy, such as the Tampa Bay Rays and Red Sox.

The book parallels some of the similar debates on Wall Street such as the difference between active and passive management of mutual funds.

Active management involves visiting companies (similar to scouting players) and trying to predict which companies will outperform in the long run.

Passively managed portfolios are based on a creating a mutual fund portfolio based on a certain index such as the S&P 500 or the Russell 2000 small company index or an internally created index of undervalued companies.

Typically, actively managed mutual funds cost more to manage, like the high payroll teams in baseball. Passively managed funds tend to cost less to manage, like the low payroll teams in baseball.

Academic researchers have found that small capitalization stocks and value stocks have historically performed better than growth stocks. In baseball terms, small-cap stocks are like unknown baseball players, and value stocks are like baseball players with high on-base and slugging percentages with low salaries. Growth stocks are like high-priced players near the end of their careers, whose production tends to tail off.

One of the earliest pioneers of an index fund was David Booth. He started Dimensional Fund Advisors with partner Rex Sinquefield in 1981, and the first mutual fund they created was a small-cap, passively managed fund.

As the fund family grew, they enlisted help from many well-known names in academics, such as Nobel prize winners Myron Scholes and Robert C. Merton, in addition to Kenneth French and Eugene Fama. Fama is widely recognized as the father of the efficient market hypothesis.

Through extensive research they have found that small and value stocks have produce better returns over the long haul than large companies and growth stocks. They also have found that when you create a diversified portfolio of stocks around the world, tilted toward small and value, you should get better returns over the long term.

You wouldn’t want to create a portfolio consisting of all small stocks mutual funds and value funds because it would be too volatile. You are going to have to include some larger-cap funds and bond funds to provide stability, just like you would on a baseball team by including veterans along with the younger players.

I am not sure of the baseball parallels at Dimensional, but Fama could be compared to Sabermetrics inventor James. In addition, Booth and Sinquefield are in a sense like Billy Beane because they employed strategies that were not widely accepted on Wall Street.

In the investment world, there are many studies that show passively managed funds outperform in the long run – not to mention the lower tax bill associated with passive funds. But the debate still rages on Wall Street as to which method is better – active or passive. Similarly in baseball, teams win and lose with both methods.

In the end Billy Beane has to struggle with what is important to him in terms of his values and goals. What does he value the most – family, baseball or money?

Every investor’s wealth-management plan should address what is important to them in terms of values and goals. They should have a good general manager to coordinate their wealth-management needs to maximize the chances they will be successful. Finally, if you haven’t read the book or seen the movie, I highly recommend both.

Robert J. Pyle is a baseball enthusiast and is president of Boulder-based Diversified Asset Management Inc.He is an investment adviser registered with the Securities and Exchange Commission. He can be reached at 303-440-2906.