Moneyball: a story of faith in an objective strategy

Moneyball: a story of faith in an objective strategy

Evidence triumphs over anecdote

If you’ve seen the movie “Moneyball”, (or read the book by Michael Lewis), you may have picked up on some similarities between the issues faced in managing a major league baseball team and those faced in managing investment wealth.

If you’re not familiar with the movie/book, it tells the story of Billy Beane, a professional baseball manager of the Oakland A’s, a low tier baseball team in the US major league. To overcome the financial power of the top tier teams, he adopts an approach that focuses on buying the attributes that win games (rather than buying the specific players he thinks will win games).

Rather than replace a high profile, big hitter with another equally expensive big hitter, Beane looked for other ways to replace him. The team didn’t necessarily need another big hitter, they needed to replace the (statistical) attributes that they had lost (e.g. the average number of times he got on base per game). By looking at player selection in this way he gave himself the freedom to build a winning baseball team without the restrictions imposed by traditional methods.

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Is your investment risk strategy paying off?

Is your investment risk strategy paying off?Are you an intelligent risk taker?

Most investors accept the notion that risk and return are related and that those who are prepared to take on more risk will ultimately get rewarded for their risk taking. As we’ve seen with the implosion of some investments during the GFC, increased risk taking does not always guarantee higher returns, it simply exposes you to the opportunity for higher returns.
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Taxes, investment costs and investment returns

Taxes, investment costs and investment returns High before tax returns may not be best …

If you accept the often repeated warning that past investment returns do not provide a guide to future performance, you would be smart enough to not select a fund manager based simply on their recent results.

But what if you knew for certain (which you couldn’t) that a particular investment manager would return 1% p.a. above their relevant market indicator, before investment costs and taxes, for the next 10 years. Would you select that manager in preference to one that guaranteed you the market return? As we demonstrate, not necessarily.

Your objective as an investor should be to maximise your investment returns after-tax, costs and inflation for the amount of risk you accept i.e. your net risk adjusted return. In this article, we will focus on the importance of taxes and investment costs (e.g. fund manager fees, transaction costs). We have discussed the risk issue extensively in our “Foundations of Financial Economics” articles and, excluding inflation indexed bonds, there is little an individual investor can do, directly, to take account of inflation.
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Is there value in trying to time your entry & exit from the market?

This article aims to address the pros and cons of the investment strategy known as ‘market timing’.

Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions and the strategy is based on the outlook for the market as a whole, rather than for a particular financial asset.

The aim of the market timing strategy is essentially to switch between growth assets and defensive assets in order to generate a better risk adjusted return than that from holding a strategic combination of both asset types. When the future looks bleak, the market timer reduces their exposure to growth assets and increases their exposure to defensive assets. When the future begins to look rosier, they will begin to increase their exposure to growth assets at the expense of defensive assets.

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