Repeat after me – a successful investment process is pointless unless it is demonstrably replicable

By Nick Kirrage.

Moneyball: The Art of Winning an Unfair Game is a 2003 book by Michael Lewis – and now a film starring Brad Pitt – that charts the phenomenal rise of the underdog Oakland A’s baseball side under the management of Billy Beane, the pioneer of an analytical and statistics-based approach to building a competitive team known as ‘Sabermetrics’. It has nothing and everything to do with investing.

The parallels are in fact quite scary because, at its heart, the book is a great study of human behaviour and of how to get ahead if you have a process that is repeatable. It is all very well looking for a great fund – or baseball – manager who talks a good game, seems sensible and has achieved some decent performance but that all adds up to nothing if they cannot keep repeating what they have done.

As value investors, what we are saying is we can tell you – better yet, we can prove to you – that what we have done in the past is repeatable because we are following a process and that process is very explicit and it can be backed up with numbers. That is also what Beane achieved with Sabermetrics.

Baseball is a sport awash with statistics and Beane used them to great effect to challenge the received wisdom on how to judge the quality and effectiveness of a player. That received wisdom had it a player should be of a certain type and athleticism while Beane saw that was irrelevant so long as they had a superior record of crucial skills such as, for example, getting ‘on-base’ over and over again.

The players who could manage that but did not fit the conventional image of the perfect athlete tended to be available very cheaply – a gaping loophole Beane exploited to achieve huge success on a relative shoestring budget. To translate that into investment terms, it is comparable to the way many investors currently want to own Diageo even though they could buy Irish cider maker C&C, which has a lot of similar attributes, on a much cheaper valuation. Why would you not do that?

Sign up for our free email newsletter here, for your chance to win an Amazon Kindle 3G Wifi.

This entry was posted in Returns, Risk, Value Investing. Bookmark the permalink.
Subscribe Find an Adviser