Jared Dillian Editor, The 10th Man
As I write this, the Yankees
are down 2-0 to the Orioles, on their way to a sub-75 win season. Anyone want
to take the other side of that?
“How can you not be romantic
about baseball?” asks Jonah Hill in the movie Moneyball, based on Michael Lewis’s 2003 book
of the same name. How can you not?
I have always liked that thinkers tend to be
fond of this game, like the late David Halberstam and George Will and even
Keith Olbermann. I loved to play ball, but I was only average. I spent more
time in my room playing with statistics, with a pencil and notebook, before the
existence of computers and spreadsheets.
It’s not news that the geek
squad has taken over the game, probably for good. I don’t even recognize the
new statistics—stuff like WAR, BABIP, VORP, and something called PECOTA, Player
Empirical Comparison and Optimization Test Algorithm.
What? I was a math major,
and even I can’t figure this out.
To some extent, it’s
diminishing my enjoyment of the game. Seems like they have the infield shift on
every other play. I’m sick of watching left-handed power hitters bounce into
groundouts into short right field. I miss bunts. I miss stolen bases.
But there is a lot of money at
stake here. Not just for the teams, which have finally found a way to quantify
talent, but for the sports bettors, like my friend and former Lehman colleague
Joe Peta, who found a way to use sabermetrics to great advantage in Vegas, and
wrote a book about it.
Igor the Traderbot
There was a point in my career
at Lehman, when I was trading index arbitrage, where I pretty much knew that
unless I figured out a way to trade algorithmically, I was going to be out of a
job.
One, I wasn’t a programmer.
Two, I didn’t even know where to start. And three, I doubted Lehman would have
put the resources behind it. So I was out of a job.
I was also a floor trader.
Those guys lost their jobs too.
There is a huge existential
crisis on Wall Street now, especially in equities.
Thousands have been laid
off. Some guys are still hanging around for a couple of six-figure orders every
month so they can make their mortgage payment, but the picture is exceedingly
bleak. Usually a bull market means happy sales traders, but not anymore.
The credit guys are still doing
well, but they will get what’s coming, someday.
What do you do if you’re a
trader and you lose your job to a computer? You are not uniquely qualified to
do anything in particular. Some people become insurance agents. Some people
open restaurants. Some people work
at restaurants.
The beneficiaries are the young
kids, the computer science majors who program computers to trade ticker symbols
about which they know nothing at all.
It’s a weird situation. The
game of baseball has gotten more efficient, and the game of trading has gotten
more efficient. It can be tempting to go up against the computers,
head-to-head, like day traders do. Don’t do that. You will get your clock
cleaned, like Brian Cashman, who admitted at a conference I attended to using
sabermetrics only sparingly.
How to Beat the Bots
The one thing computers have
yet to figure out in baseball is chemistry.
Sometimes players get along, sometimes they don’t, but no computer will be able
to quantify its contribution to the number of wins each season. The corrupt,
lovable ’86 Mets got along famously. For the last few years, the Yankees have
looked like they have as much chemistry as a university history department.
When it comes to stocks, you
can’t beat the computers by trading faster (duh), but people try. In fact,
having a holding period of anything less than a few days is just madness.
But computers are not
clairvoyant. They can’t see the future, but in some cases, people can.
I’m not talking about what the
Fed does, stuffing data naively into economy.xls. By 2006, it was obvious to
much of the investing community that there was a housing bubble, yet it didn’t
become apparent to the Fed (which is basically a computer) until the very end.
Sometimes it’s just obvious. The coming Canada bust seems obvious to me. The
BOC still sees a soft landing. Go figure. (I explain how to short Canada and
how to invest in the US housing market in the last two issues of my investment
letter, Bull's Eye Investor
—you should check it out.)
Whenever I talk to investors, I
always tell them to stretch out their holding period, by months or years.
Computers have made things efficient in the short term but have actually
contributed to greater
inefficiencies in the long term. Before computers, I used to worry about entry
and exit points. Now I couldn’t care less. The value is in the idea and the
risk management. The execution is worth diddly.
You should be thinking more,
and doing less, which goes for just about everything nowadays.
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