View From a Height

I read Michael Lewis's Moneyball the other week, and one of the first things that came to mind was a comparison to investing. Moneyball explores the Oakland A's search for better cheap talent through market inefficiencies. They discover these inefficiencies by sifting through massive amounts of data, and by, in effect, playing a different game from everyone else. The look for correlations between statistics and runs - in their case, on-base percentage and slugging.

They also do something really funky. They calculate the value of everything a player does - ever batted ball, every fielding play, every pitch - in terms of how much that play made his team more or less likely to score in that game, and then add them up. Nothing matters but outs and runs. Get enough runs, forstall outs long enough, and wins will follow. That's playing a different game from everyone else.

They are the quant funds of baseball.

Compare them to the Atlanta Braves. Boys not born the last time someone else won the Braves' division were complaining about getting fountain pens last year. They rely on traditional scouting, trying to project what a player can become, looking for them one gem at a time.

The Atlanta Braves are the value investors of baseball.

Compare them both to the Red Sox & the Yankees. These guys have money to burn, they frequently try to buy whatever proven talent is out there, often overpay for it, and often don't keep it very long. They'll break teams apart, change management with glee, raid weaker & poorer teams for their best players.

The Red Sox & Yankees are Carl Icahn and T. Boone Pickens.

The interesting thing is that you can win both ways, and you can make money both ways. And what's more, you can find lots of different types of value, and you can and you can find lots of different quantitative inefficiencies. As part of my research last year, I interviewed three different quant fund managers, and know of a couple others. They each do something different, and they each consistently beat the market. Finally, you can also make a lot of money turning around failing enterprises and buying up juicy bits of your competitors. But it's a lot of work running the business.