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« Traditional Risk Management - Where does it fit in the future of Portfolio Management? | Main | Grantham's Great Investor Attributes »

February 27, 2009

Michael Lewis: Moneyball - Basketball Style (Why investors should heed the lessons of probability)

As a North Carolina Tarheels basketball fan, it pains me to say, “I like Shane Battier.”  After reading another great article by Michael Lewis in the New York Times titled “The No Stats All-Star” I recognize his skills of making his team better and it helps explains some of the losses he handed my beloved Heels during his reign at Dook.  However the greatest take away from the article, just like Michael Lewis renowned book Moneyball, is you better get smart if you don’t want to get left behind. 

Michael Lewis highlights Shane Battier’s professional basketball team, the Houston Rockets, and more specifically, their General Manager, Daryl Morey.  Morey has applied the same logic that Billy Bean used to take the Oakland As, one of the lowest payroll teams in baseball, to the second highest winning percentage over the course of his career.  The logic is founded in discovering the metrics that have the largest impact on the team’s ability to win and then measuring the player's attributes that have the highest probability of positively influencing these factors.  The idea sounds simple but it has taken years for the baseball and basketball establishment to adopt them, and many still have not (see Michael Lewis's quote at the top of "8 Mistakes" article).

“The virus that infected professional baseball in the 1990s, the use of statistics to find new and better ways to value players and strategies, has found its way into every major sport. Not just basketball and football, but also soccer and cricket and rugby and, for all I know, snooker and darts — each one now supports a subculture of smart people who view it not just as a game to be played but as a problem to be solved. Outcomes that seem, after the fact, all but inevitable — of course LeBron James hit that buzzer beater, of course the Pittsburgh Steelers won the Super Bowl — are instead treated as a set of probabilities, even after the fact. The games are games of odds. Like professional card counters, the modern thinkers want to play the odds as efficiently as they can; but of course to play the odds efficiently they must first know the odds. Hence the new statistics, and the quest to acquire new data, and the intense interest in measuring the impact of every little thing a player does on his team’s chances of winning. In its spirit of inquiry, this subculture inside professional basketball is no different from the subculture inside baseball or football or darts. The difference in basketball is that it happens to be the sport that is most like life.” – Michael Lewis,"The No Stats All-Star", The New York Times, February 13th, 2009.

It all boils down to maximizing the team's expected return (probability-weighted return) in all situations.  If it is forcing a player to take an 18-foot jumper going to his left, foul tipping an extra 2 balls per at bat or describing fundamental research in a probability-weighted return framework.  All of these tools simply increase the team's chances of winning.  The teams that adopt these philosopies will succeed while their competitors parish.  And just like in baseball and basketball, investors must adapt  their strategies by determing the factors that have the greatest influence on returns.  In doing so, fundamental investors will find that maximizing their portfolio's probability-weighted return will in fact be the single greatest contributor to success. 

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