The Moneyball Method
A Middle-Class Manifesto for Objective Investing
INTRODUCTION
“God, grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference.” The Serenity Prayer, Reinhold Niebuhr
If you’ve heard of Moneyball, you probably know it as the hit movie from 2011 starring Brad Pitt as Billy Beane, General Manager of the 2002 Oakland Athletics baseball club. Based on the 2003 book by Michael Lewis, it is the story of Oakland’s division winning season after losing three of their star players to free agency. Thanks to Beane’s success and the film’s power, Moneyball became known for statistical analysis, risk management, and profitability in professional sports.
Beane’s mandate was to build a winning team, do it with the lowest payroll in the division, fill the stands with paying customers, and make money. Ultimately, such a tall order for a small market club meant the lowest cost per win. For that, Beane needed to reject MLB’s traditional methods, find a reliable way to judge cheap talent, and do it under ridicule from the baseball press.
The Serenity Prayer illustrates Beane’s challenge. He could control only what he could control, and more to the point, measure what his players could control. That may seem obvious, but wisdom is not automatic, courage without wisdom can be counterproductive, and serenity needs lasting courage. Accordingly, these three virtues are codependent, which means that reality and consciousness must work together to formulate winning principles.
For Moneyball investors and advisers, the lowest cost per win begins with the investors’ chosen values, the money needed to achieve them, and the uncertainty of market performance. That is how investment success is earned, and credit for this book’s embrace of market uncertainty and financial risk capacity originate with David Loeper, CIMA, CFA; the CEO of Financeware, Inc., and the creator of its eponymous, groundbreaking simulation software.
In addition, The Moneyball Method draws inspiration from the Nobel prize winning work of Harry Markowitz (Modern Portfolio Theory), Gene Fama and Ken French (Efficient Market Hypothesis), and Friedrich Hayek (Price Discovery). Complementing them is the work of economists George Reisman, Richard Salsman, and Brian Simpson. For goal-directed action, I lean on psychology professors Edwin A. Locke and Gena Gorlin, and for the ethics of individualism and capitalism, on novelist and philosopher Ayn Rand.
To be clear, this set of procedures is most suitable for middle-class investors of any age who own a brokerage, retirement plan, trust account, bank deposit, or annuity account. Furthermore, this book does not encourage individual security selection or recommend any specific security. The presumption is that the reader has knowledge of and experience with the basics of common stocks, corporate and government bonds, money market funds, mutual funds, ETFs, REITs, and some alternative investments. That includes registered representatives, and the suitability of any security and investment strategy is the responsibility of the investor and their registered adviser.
For Moneyball investors, the strategy decision begins and ends with the variables we know about or can control: the investor’s unique values, current and future resources, saving and spending habits, risk exposure, taxes, fees, and changing circumstances. As readers will discover, flexibility is one unique feature of Moneyball, and a benefit is a higher degree of compliance with the suitability standards imposed by government regulators.
Financially, Moneyball is for making important decisions that require money. Economically, it respects the price mechanism of free markets. Practically, it’s the integration of cash flow, investment strategy, and uncertain capital market performance. Logically, it is goal-directed action. Socially, it redefines the investor and advisor relationship. Emotionally, it helps satisfy material and spiritual aspirations. Psychologically, it requires introspection. Ethically, it means becoming your own hero.
Part I of this book is titled Theory because it deals with the concepts of markets, prices, money, profits, risk, and time. Accordingly, Moneyball principles are compared to the standard best practices of adding alpha, macroeconomic reports, market forecasts, historical benchmarks, custom portfolios, risk tolerance, and reversion to the mean. Part II is titled Practice, and it begins by exposing the deficiencies of traditional best practices. In turn, the last five chapters present a reliable alternative - one that integrates the investor’s money, time, and lifestyle values with prices, markets, and risk capacity for an efficient spending and investment strategy.
For background, I was introduced to capital market simulations in 2006 by an independent consultant to the investment management industry. At the time, I was the Regional Training and Branch Manager for a major Wall Street brokerage firm. For the previous eight years, I held positions as Financial Advisor and Branch Sales Manager. Much of this meant interviewing, hiring, and supervising rookie Financial Advisers.
While the training program offered by my firm included the basics of Modern Portfolio Theory, it did not include the ideas in this book. In fact, our training program included the fallacies that are identified with industry best practices. To be clear, Moneyball does not replace comprehensive financial planning, however the principles in Part I and the procedures in Part II serve as a solid foundation.
In time, I became part of the investment strategy team of a regional bank’s trust department and had the authority to put these principles into practice. Accordingly, this book is the product of those ten years of learning and consulting for the bank’s individual Wealth and Trust Department clients.
Ultimately, investors and advisers will decide for themselves which method is best. Pretty swings at bad pitches or getting on base? Unreliable scouting or objective results? Traditional averages or reliable data sets? Rate of return percentage points or dollars of future wealth? Instead of predicting the future, the Moneyball investor’s objective is to gain all possible values, avoid pointless risk, be flexible with strategy, and have newly discovered confidence in the one life we have. In other words, independence.
Because rational judgment (wisdom) and principled action (courage) are vital for that emotional tranquility (serenity), Moneyball begins with the life of the investor. Essentially, all living organisms have three things in common: the energy source of mitochondria, the memory chip of DNA, and the glue of proteins that hold it all together. For people, add concept formation. No one can change these facts.
The same is true of people trading in the complex socioeconomic system of civilized society: the energy source of money, the memory chip of prices, and the glue of markets that hold it all together. For political structure, add objective law. When people with faulty concepts try to improve on that, it doesn’t work out so well. America proved it, and so can investors willing to take ownership of their futures, get on base, score runs, and win the long season with confidence.
