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Expert Perspective

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Investment e.Perspective

Current Issue | April 27, 2017

Investment Lessons from Moneyball

By: Cameron Johnson, MBA, CFA, Senior Investment Strategist & Oxford Investment Fellow


When summer arrives, baseball tends to consume my household. My son plays traveling baseball and I coach his team. This year our hometown team, the Twins, is even worthy of watching. Last weekend, in a rare evening off, we chose one of our favorite baseball movies, Moneyball. The movie "Moneyball" chronicles how Billy Beane, the general manager of the Oakland A's, utilized an unconventional approach to construct his team. The approach proved to be extremely effective, leading the A's to achieve significantly more success than teams with much larger payrolls. There are lessons to be learned in Moneyball for investors. Following the consensus opinion in investing rarely leads to success. As Howard Marks, the chairman of Oaktree, has written, "Everything that is important about investing is counter-intuitive, everything that is obvious is wrong."

Traditional baseball scouts focused on power, speed, fielding and arm strength... clearly factors which were contributors to a baseball player's success. The problem with these traits is that everybody recognized they were important so it was difficult to acquire players with those traits cheaply. Billy Beane utilized analytics to determine lesser known characteristics in baseball players that led to success and found the scouts were undervaluing critical attributes such as a high on-base-percentage. By drafting and trading for players with these qualities, he assembled a highly competitive team at a significant discount.

With investing, success also requires challenging consensus. Consensus thinking most dangerously leads investors astray at peaks in markets. My career as an equity analyst began in the mid-90's. A degree in finance and a CFA were of little value in navigating the markets at the time. Friends and family were having great success investing based on their instincts and "gut-feel". I remember hearing nearly daily about one local technology company. The company was a provider of the infrastructure necessary to allow delivery of high speed-internet to the home. They were a leader in a rapidly growing market and also one of Fortune's most admired companies. I remember a friend declaring "everyone in town is getting rich with this stock." Unfortunately, by the time "everyone" knew about this stock it had appreciated dramatically. The market was valuing the business at over $20 billion despite just $1.5 billion in sales. As with many technology companies, leadership was difficult to sustain and growth was overestimated. Ten years later the business was acquired by a competitor for $1.5 billion, over 90% below where it had been trading when everyone knew it would be a success.

Following the consensus can be equally harmful at market bottoms. Near the trough of the market in 2009, I attended multiple meetings with clients who were determined to sell their investments and move to cash. The market and the economy were dropping precipitously with no bottom in sight. Comparisons to the depression were rampant. It seemed clear to everyone that stepping to the sidelines was the prudent course of action. Those that followed the consensus significantly reduced their chances of meeting their long-term goals and missed a tremendous opportunity.

Investing is counter-intuitive because when consensus becomes so convinced that a positive outcome is certain, investors bid assets up to levels which, in fact, make them extremely risky. When the majority concludes that prospects are dire, prices often reach levels which provide great opportunity. Billy Beane rejected conventional thinking and developed analytical tools to identify undervalued attributes in players. Challenging conventional wisdom and using analytical tools to gain an objective perspective on risks and opportunities in markets is critical to investment success.

This document represents the opinions of the author as of 6.17.2015 and is subject to change at any time due to market or economic conditions, or other factors.