Baseball season is here. The Cubs are (still) World Series champs. For now all is right with the world. From a piece by Jared Diamond in the WSJ:
The adherents of this growing trend view the windup as a pointless anachronism, a relic from a previous era that appears to make sense in theory but fails to hold up to scrutiny. It seems logical that the rocking, twisting ritual of the windup would help pitchers derive more power.
But today, some believe the windup only creates excess movement, offering more opportunity for something to go awry. From the stretch, they simply hike their leg and go.
Without the extra and unnecessary motion, they can more easily replicate their mechanics, leading to better control and rendering the windup into nothing more than an elaborate way of pitching worse…
But the primary reason the windup is still so prevalent is simply because of tradition and routine rather than competitive advantage.
Kinda sounds like an investing discussion between the adherents of active management and evidence-based investing techniques. In investing, like in most other endeavors in life, we do things simply because that is how they have always been done. Not because they have been scientifically proven.
If nothing else, pitching from the stretch is a more repeatable motion. The goal of every pitcher is make each pitching motion, whether they are throwing a fastball, curveball or slider, look exactly the same to each batter. Not tipping your pitches puts the batter at a disadvantage.
Repeatable process are at the heart of quantitative or evidence-based investing strategies. Leave aside the actual stock selection process whether it be value-based, momentum-based or multi-factor. The key component to all of them is having an emotionless, consistent process that responds to incoming data with a preset formula in place.
The odds are already stacked against stockpickers. From a Oliver Renick piece at Bloomberg:
The distribution of returns in the stock market is bizarrely lopsided. Often, equity benchmarks are so reliant on gigantic gains in just a handful of stocks that missing them—as most managers do—consigns the majority to futility. “Your intuition is that you can randomly pick stocks and start at zero,” Heaton says. “But the empirical fact is if you randomly pick, you are starting behind zero.”
Simply indexing your portfolio removes the issue of skew from the table. If that is not an option, taking the human element out of the day-to-day running of a portfolio can eliminate some of the slippage that comes from human emotions. As Joel Greenblatt of Gotham Funds said in a recent Talk at Google:
Your job is to be cold and calculating, and unemotional. Unfortunately, people are human. That’s good news for us, but the stats are against you.
Greenblatt earlier in his career was a highly successful, traditional active hedge fund manager, and author of the classic You Can Be a Stock Market Genius, but eventually switched over to a quantitative investment process. That doesn’t mean you should switch to a more repeatable proceess, a la Greenblatt or Strasburg, but it is worth thinking about.
You can watch the entire Joel Greenblatt talk below: