Melanie Oudin, Billy Beane, and the portfolio management process

Today in the Wall Street Journal an article appeared highlighting U.S. Open women's tennis sensation Melanie Oudin and in particular the research and coaching innovations of coach, Brian de Villiers of Atlanta's Racquet Club of the South.

The Journal article notes that Mr. de Villiers' use of extensive analysis of the videos and statistics of opponents is revolutionary in tennis, where: "Thanks to a combination of cost, complexity, the nature of the sport and the weight of tradition, tennis is still in the dark ages in the use of digital-video analysis and statistics."

Although not mentioned in the Journal article itself, this observation reminds us of the insightful 2003 book by former Solomon Brothers trader-turned-author Michael Lewis, Moneyball. That book chronicles the revolutionary coaching of baseball manager Billy Beane of the Oakland A's, and especially his use of a variety of criteria and statistics to analyze players and discover undervalued talent. Lewis describes how Beane's rigorous approach was a stark contrast to the analysis that had prevailed before, in which scouts would rely on a sixty-yard dash time and a "gut-level" analysis of a player's hitting and throwing form.

This storyline, common to both Moneyball and the Melanie Oudin article, has a direct application to portfolio management. The question of what criteria you are looking for in a business -- and how you go about analyzing those criteria -- is critical to money management.

The differences in money management "styles," in fact, can be properly understood as differences in the characteristics that different managers emphasize. A manager who belongs to the "value" school might focus on certain cash flow measurements in order to look for a business whose shares are trading below its actual "intrinsic value," much the way Lewis describes Billy Beane -- who was, after all, assembling a "portfolio" of players on his team. A manager who follows the classic growth investment process which we have described in numerous previous articles might emphasize certain other measurements of a business, such as those we described in this previous post.

This concept is very important for investors to understand. If you manage your own investments (which we have argued previously is a valid approach to building wealth), then you are in the position of a Brian de Villiers or a Billy Beane: you must determine which criteria are most important to focus on, and you must determine how you are going to measure those criteria.

As strange as it is to read about the lack of rigorous fundamental analysis in the high-stakes world of coaching tennis or scouting baseball at the highest levels of the game, it should also go without saying that selecting companies in which to invest significant amounts of capital should not be done by "gut feel."

Another important aspect of this issue is the consistency of the criteria by which you invest your capital over the years and decades. An investor who is managing his own investments, presumably, can keep these criteria consistent through time (after some years of developing his process and deciding what he should be looking for).

However, as we have noted in this previous post, getting a consistent process for years or decades is very difficult if you hire a professional to manage your money. One reason it is difficult is the fact that managers of big funds are often fired or replaced quite frequently, or move on to the next opportunity after a few years of success. The other reason a consistent process eludes many investors is that the intermediary system of investing often leads to the investor being switched from one process to another every few years (extensive research has demonstrated the detrimental effects of this inconsistency).

Investors should thoroughly understand this lesson from the world of sports, and should know the criteria behind their investment process and the importance of keeping it consistent over the years.

Subscribe (no cost) to receive new posts from the Taylor Frigon Advisor via email -- click here.


Post a Comment