Monday, May 16, 2011

Baseball and Investments

Last fall, Shane Justis joined Gann Partnership, LLC. In Shane's previous life, he played professional baseball for both the Los Angeles Dodgers and the Milwaukee Brewers. As a child, Shane was intrigued with investments, and always planned to go into the profession after baseball. When he interviewed, my first question for Shane literally was, "why in the hell do you want to go into this crazy business?" When Shane immediately without any hesitation responded that he truly wanted to help people, we knew that we had found the one. I had been interviewing other strong candidates for over two years, and this was the answer that I was seeking, but only heard from Shane. Shane has integrated very well, and he is a vital member of our team.

Shane has made numerous comparisons as to how he managed his baseball career and how we manage clients' assets. Even I, who was never a jock, am now thinking in terms of baseball references, and wish to share some of the insights that Shane learned on the baseball field and how we are applying these principles into our field of investment management.

A) Going for Singles and Doubles and Avoiding the Strike Outs

Our investment mandate is first and foremost to do no harm. This means that above all else, we evaluate the global macro and domestic micro economic conditions, including trends, breadth, relative strength of specific market sectors, supply and demand, and institutional investment participation to determine how and where we should allocate to avoid losing principal. Achieving steady, consistent positive returns is the holy grail for true investment success. The power of compounding is magical. But compounding works in both directions. It is overwhelmingly favorable when returns are positive, but it is extremely destructive and often fatal when returns are negative. The batter who consistently hits singles and doubles has a much better batting average and is a more valuable member of the team than the batter who swings for the fences each time at bat, but gets fewer hits. There are times where we hit investment triples and home runs, but when we approach the plate, we are swinging for consistent hits and avoiding strike outs.

B) What's a good batting average

A baseball player with a long career of earning a batting average of 300 can easily qualify for acceptance into the Hall of Fame. This average indicates that this player is good for a hit 3 out of the 10 times he bats. It also means that even though he fails 7 out of 10 times to get on base, he is nonetheless a hero and likely a Hall of Famer. An exceptional batting average would be 330. A weak average would fall around 250, and an average player's average would be somewhere between 250-275. This is huge for two reasons. First, it shows that there is not that big a difference numerically between being average and being exceptional. Second, it is proof that you don't have to be profitable on every investment decision to still be a "hall of famer". We are consistently seeking ways to increase our investment batting average with full awareness that not every trade, regardless of the logic behind it, will work out.

C) Owners, General Managers, Coaches and Players

Teams in professional baseball are comprised of owners who appoint general managers, who hire the coaches, who in turn recruit the players. In many ways, we are structured very similarly. We are the investment general managers, who work on behalf of our clients, who are the owners. As the general manager, we assemble and monitor the investment management teams and determine the appropriate asset class mix and investment strategies. The investment management teams which we appoint and monitor serve as the coaches, who pick the "players" by analyzing and selecting the specific investment opportunities based on a disciplined investment process. We pull the team together and make changes to the lineup as markets and opportunities evolve. The pitcher is clearly an integral part of a baseball team and its success. Team managers must not only be on the prowl for good pitchers to add to their club, but to consistently win games, they must know when it is optimal to pull the starting pitcher from the mound and have a relief pitcher ready and able. Just as there is a right time to pull a pitcher from the mound in both winning and losing situations, there are times when we must reassemble our investment teams. Being independent and not tied to any one investment firm is critical to being objective and remaining unbiased to make the right changes on behalf of our owner clients. Investing for us is a team effort, and there is great power in having a strong team.

D) The Science Behind Baseball and Investing

Ted Williams is recognized as "the greatest hitter who ever lived". He was the last player in Major League Baseball to bat over .400 in a single season. He also holds the highest career batting average of anyone with 500 or more home runs. Although Ted was born with innate talents, there has never been a more devoted student of the art of baseball hitting. In fact, Ted Williams is the author of The Science of Hitting where he enumerates 77 zones of hitting. He approached baseball as a science, and studied it from all angles.
Good baseball players have to study the strengths and weaknesses of opposing pitchers. And fielders have to study the strengths and weaknesses of batters. For amateurs, baseball might appear mostly as raw talent intersecting with luck and randomness. However, for professionals, it is a game of study and practice.

As investment professionals, our work similarly may appear to be luck and random. However, in reality, mastering our art involves a tremendous amount of discipline and study. Wayne Gretzky, arguably the best hockey player ever, is known for his quote, "I skate to where the puck is going to be, not where it has been". Knowing what investments have done requires no skill. Studying markets to project what they will do, is the true art of investment management. Sports, like investments, can either be a game and a hobby, or they can be studied from a variety of disciplines, and mastered as a profession. Knowing where the market is likely to trade requires as much dedication as knowing where the "puck" is going to be or the baseball is most likely to be hit.

We invite you to forward this to others who would appreciate the analogies between sports and business. And, if you are curious and want the inside scoop on what life is like for a professional athlete, or wish to speak directly with Shane about how specifically he is incorporating his on the field baseball skills into the field of investment management, we invite you to call our office.

Wishing you all the best,

Greg Gann