Play ball â€¦. It is finally baseball season: Lessons fund managers can learn from our American pastimeBy Edward Strafaci
Spring is here â€¦ and what better way to celebrate it than by cheering on your favorite team. Baseball is finally back!
In fact, for many of us, baseball serves as a zeitgeber to awaken our souls from the long slumber of winter. In a phrase that may be hackneyed, “every team is in first place on opening day.” That is perhaps the most poignant signal that we are ready for the enthusiasm that springtime and baseball offer us.
There are numerous similarities between Fund Management and sports. Many former athletes are attracted to the business of Wall Street. A life in the industry requires quick reflexes, stamina and the desire to compete. One is judged at the end of each trading day and the results are clearly “black and white,” or should we say “green or red.” Thus, there is a great deal to learn from sports and in particular, our national pastime. Here are a few lessons:
It’s a Long Season
It is definitely a long time between “pitchers and catchers” and the World Series. The best baseball managers realize that they cannot win every game. However, they try to preserve their team’s resources similar to a general at war, as well as, win 2 out of 3 games per series. Finishing the season at a twoâ€“thirds winning percentage, possibly guarantees a post season playoff spot.
Fund Managers are well advised to learn from this tactic. You cannot make money every day. However, if your winners outpace your losers, you will most likely attain a competitive track record. A manager also needs to be fresh from January to December. That means knowing when to walk away from the tape and rest one’s thoughts. They are called the “dog days of summer” for a good reason.
Consistency, and controlling the noise, is key
Great managers spot a player with a consistent approach and pencil them in the lineup every day. Good players know that they need a “repeating swing,” they refuse to revamp their style during an occasional slump. They may make adjustments, however, the All-Star remembers what got them to the majors. Performers such as Derek Jeter or Albert Pujols know their mechanics better than anyone and thus, trust themselves. They learned this on the field as kids. They also control their emotions. By ignoring the outside noise, the professional competitor ultimately produces, wins and stays on top of his game.
A money manager who has gotten to the professional level did so because of a sound, fundamental methodology as well as, hard work. Just because the markets are trading away from you, does not call for a complete rethinking of your style. You may need to get in cash for a while and wait for the “ripe” opportunity. Graham and Dodd still make as much sense today as when they were written “many moons ago.”
It is important to shut out the noise, whether it is from financial television or curious colleagues. While it is true that rejecting sound advice is just plain stubborn, much of what we hear on television, as well as, on the phone, may be tainted by another agenda or boredom. A good manager needs to discern these two sounds. It never ceases to amaze me how some raucous pundit can scream ten new ideas, every night, during a one hour show. You are best off to tune out this sort of racket. These folks need to fill time between commercials. It is hard to come up with one, or even two great investments per year. Good investments are like good friends â€¦ they are hard to find.
Home Runs are spectacular yet ’small ball’ and defense wins games
Let’s face it, everyone loves the towering home runâ€”it’s the stuff of legends. Winners in baseball understand that it is scoring one more run than the next guy that counts in October. Smart baseball skippers, play “small ball “and push runs across the plate. When combined with sound pitching and good defense, the wins pile up.
A good money manager sees that in a quest for a financial home run many opportunities are squandered. Worse yet, is that a home run swing is usually accompanied by a strike out. Small returns add up at the end of the year, especially if the outsized loss is avoided. A manager who has a string of profitable years, hands his investors a gain â€¦ and often a tax bill. If they give back even half of those gains in a bad year, the tax code does not rebate the capital gains paid for. In that respect, the outsized down year, or strikeout, gets doubly penalized. Good defense is clearly rewarded.
Sometimes we need to look overseas for opportunities
Baseball executives have long appreciated that there is great talent to be found offshore. Many overseas players have come to dominate the game. They also bring a different dimension and knowledge base to the table. A recent New York Times article spoke about how some Manhattan private schools are sending their baseball teams to the Dominican Republic to hone their skills during spring break. Foreign influence is undoubtedly an intricate part of the game.
A good manager should seek some sound overseas investments to compliment a portfolio. As in baseball, the caution is that you need to be sensitive and respectful of the dissimilarities found when investing in different countries. Currency and geopolitical risks come to mind to name a few. Still, the well thought out overseas play can produce better, non-correlated, returns.
Resist the temptation of performance enhancers
The “steroid story” has been a black eye for baseball in recent years. However, the allure of artificial performance enhancement has been around since sport was invented. Unfortunately, in any competitive, well-paying industry, whether sports or Hollywood, there will always exist a seedy underbelly. The parasitic element will tend to be around any talented performer. The whisper will eventually come that there is an easier way. Some great players have succumbed to that call and have paid dearly. Others have stuck to their guns and are better off for it.
It is never worth cutting corners for a better return. Sometimes it may be a clever derivative strategy, and sometimes it can be far worse. What seems innocuous at first, can lead to disaster. Stay away from the quick fix and recognize the snake oil when it is being sold to you. No amount of reward is worth getting into trouble.
There is no question that professional baseball and money management are serious pursuits. Nonetheless, those that succeed at both, love what they do. When showing up at the trading desk or the clubhouse becomes dreadful, it’s time to rethink one’s career. Everyone gets tired from time to time. However, when it becomes “more bad than good,” that is a strong signal. It should be a career not a dungeon. Having fun may be the most important prerequisite in our life’s goals. We learn that from our first days of playing T-ball.
That is it for now â€¦ the “National Anthem” is playing. Let’s play ball !
â€”The Thoughtful Arbitrageur
Edward Strafaci is not an investment adviser. Nothing he writes should be construed as investment advice or an endorsement of any particular security. From time to time, a family trust with which he is associated may have positions in the securities he writes about. When it does, he will tell you. What he writes is meant to inform and in some cases to entertain and amuse. HedgeWorld’s Alternative Reality is not an investment advisory site. As a general rule you should not take investment advice from blogs, anyway. Consult a financial professional for investment advice, not a blog.