As the world series rages on amongst the remaining teams, we at Tall Oak were drawing analogies between baseball and finance. Baseball statistics are endless, as are financial statistics. Numbers, numbers and more numbers.
If you’ve read the book or seen the movie Moneyball, you will know that the story line is about measuring the right things. To build a talented team, make sure your statistics are about getting on base.
According to the theory in MoneyBall, RBIs (runs batted in) as a statistic is essentially meaningless. A batter has absolutely no control over the batters who go before him. Any batter, at any time is expected to try his best to hit the ball. There is no special swing or strategy that is preserved for when players are on base.
A more useful statistic, according to the book, is how often does a player get on base? And, by the way, who cares how the player got on base. If the batter draws a walk, bunts, or hits to left field, the important statistic is, can he consistently get on base? He can’t score if he’s on the bench.
In finance we have endless statistical measurements of performance. And, just as in baseball, some measurements can be more useful than others.
For example, some statistics, such as year-to-date (YTD) returns can be interesting to look at, and may be as popular to investing, as RBI stats are to baseball. But as a performance number, YTD numbers really aren’t very useful for making investment decisions. Short term market fluctuations are captured in the YTD number, but the larger, longer-term investment strategy is not. Just as a batter cannot control who else gets on base, money managers have no control over day to day market reactions to noise and news.
Instead, we focus on factors that are not only more controllable, but also have a bigger impact on long-term performance. These include overall portfolio risk, which we influence through an appropriate mix of asset allocation, and global diversification. Adding investments from outside of Canada provides exposure to opportunities not found in Canada’s energy and banking-heavy economy. We use the same overall approach whether we are selecting individual stocks and bonds for our clients or we’re selecting best-in-class money managers.
The result is not just a well considered investment strategy, but also a disciplined approach to guide your strategy as it inevitably evolves over time. Most critically, this approach aims to take the emotion out of investing, ensuring your portfolio is built objectively.
Of course, we can only take the baseball analogy so far. There is after all, no World Series of finance. The key is to pay attention to the right things. At Tall Oak Private Wealth, we continually watch the numbers and let the facts drive our decisions.