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.” Alcoholics Anonymous and 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 destructive, and lasting serenity without courage is impossible. A consistent regard for truth embodies everything needed for winning the long game.
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 principles 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 process 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, the Moneyball method is most suitable for middle-class investors of any age who own brokerage, retirement plan, trust, bank deposit, and annuity accounts. Furthermore, nothing will 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 asset classes. That includes registered representatives. Furthermore, the suitability of any security and investment strategy is the responsibility of the investor and their registered advisers.
For this author, 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, and fees, and changing circumstances. As readers will discover, flexibility is one unique feature of Moneyball, and a benefit of that is a higher degree of compliance with the suitability standards imposed by government regulators.
Financially, Moneyball is a method for making big 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 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, risk tolerance, and reversion to the mean. Part II is titled Practice, and by avoiding the technical complexity of the traditional advice model, it presents a reliable alternative. The evidence for that is an Investment Policy Statement that integrates the resources and cash flow objectives of the investor with an efficient strategy.
For background, this author 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 had 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 regimen included the fallacies that are identified with industry best practices. To be clear, Moneyball is not comprehensive financial planning, which this book supports, and the procedures outlined in Part II are 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. 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 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, Moneyball’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.
Because rational judgment and principled action are vital for that emotional tranquility, Moneyball begins with the life of the investor. In fact, 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 that.
The same is true for the complex socioeconomic system of a 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 change that, it doesn’t work out so well. America proved it. Batter up!
