The Chosen One

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Before I ever cared about early retirement, before I ever churned my first credit card, before I had ever gone to medical school, or college, or high school, hell, before I even liked girls, before any of this, I loved baseball and the San Francisco Giants.

I dressed up in homemade Giants uniforms, sweat pants tucked into socks, hat pulled low, And bounced balls off of our garage, simulating World Series diving plays.

MLB: World Series-San Francisco Giants at Kansas City Royals

What I looked like in my mind

I lugged sodas around candlestick Park as a vendor in high school mostly so I could sneak into the park and watch games for free.

The most traumatic thing that happened me during my intern year was watching the Giants lose the World Series to the Angels after being nine outs away from victory with a 5-0 lead.

The point being that there was no way that the Giants could win their third world championship in five years without me writing about it.

But this is not a sports blog, so I’ll write about the event from a slightly financial perspective.

More specifically I will write about Madison Bumgarner (a.k.a. gods gift to baseball) who just completed what was quite possibly the single best display of championship pitching in the history of the game, (and what Madison Bumgarner teaches us about investing.)

In his three World Series appearances Madbum picked up two wins and a five inning save. (And the save occurred on only two days rest , which was unprecedented.)

His ERA was 0.26 which means that he averaged allowing only one run every four games in the World Series. Remarkable stuff!

If you are not a baseball fan you’ll just have to trust me on that assessment. What this lanky southpaw accomplished in the World Series was nothing short of amazing. It was the sort of superhuman feat that makes watching live sports so unpredictable and wonderful (when you are a Giants fan.)

And the key here was really the unpredictability.

We knew Madison was a great pitcher before his first playoff game this year based on his four and a half year career thus far.

Each baseball season lasts 162 games which gives baseball aficionados a very accurate way of measuring players’ efficacy.

While any professional baseball player can be lucky over a game or two or even a week or even a month, over the long haul the season has a way of canceling out good luck with bad luck such that we are left with a pretty accurate assessment of just how skillful every player is.

The average starting major-league pitcher will pitch over 200 innings in a year. (Including the playoffs Bumgarner actually pitched 270 innings!). Each inning will include three outs to at least three batters and generally at least 10 pitches.

The point here that each season gives us a nice large sample size, and when you start piling one great season upon the next, it becomes quite clear that a player is talented. And long before the World Series even started the jury was out: Madison Bumgarner is a stud.

The playoffs are different, though. Each playoff series is a best of one, five, or seven game affair. It is, in short, a small sample size event. Which really means that anything can happen.

Luck can and will have a measurable impact on how things turn out in a short series more often than not. And possibly other non-measurable qualities can too, like heart, team chemistry, courage, and make up.

A good metaphor would be playing blackjack in a casino without counting cards. If I were to tell you that I was going to play one hand of blackjack, it would be difficult for you to guess who would win the hand. (If I were lucky enough draw and Ace and a face card I would surely win.) This is like the playoffs.

But if I were to tell you that I was going to play 1000 hands of blackjack in a casino without counting cards, you would be unwise to bet on me and against the house. This is because the odds are slightly stacked against me, and large sample sizes eliminate the unpredictability of randomness, or luck. All that is left is the underlying probability. (Which is more like a full baseball season.)

In baseball there are old-school and new school organizations. The traditional way of judging talent is with human eyes, and scouts, and intuition. The more modern way of judging talent to use the large sample size of baseball statistics to sort out quantitatively, the questions of how to best construct a team and select players.

And if I were to choose which approach I wanted my team to take when selecting players, I would choose the modern way of judging talent. This is because getting to the playoffs is largely about probability. It is a large sample size proposition.

The best example of a modern statistical based front office is that of the Oakland A’s, and Billy Beane,(made famous in Michael Lewis’s excellent book Moneyball.)

The Giants front office is generally portrayed to be old-school. The Giants general manager Brian Sabean came up as an honest to goodness scout in the Yankees organization and is regarded as somewhat of a traditionalist.

And if I had to choose, I would prefer to start my organization with a Billy Beane rather than a Brian Sabean.

(Thankfully, the Giants never asked my opinion because Sabean has recently won three championships to Beane’s zero.*)

And it is hard not to ascribe too much to the randomness of a short playoff series. As a fan I want to believe that the giant scout who signed Madison Bumgarner many years ago,saw a little something in his eyes or posture on that Appalachian high school baseball field that hinted that he was destined for greatness. and I want to believe that the Giants won because they are the best team ever, not because they got lucky.

But it’s generally not smart to ascribe too much significance to small sample size events. They are just too random.

Which brings me to investing. Madison Bumgarner’s epic performance was like investing big in Microsoft’s IPO and never selling. It was a big and thrilling win, which made the fans (investors) feel great about themselves, but it is not a high probability roadmap for future success.

The new school approach to Scouting is more like buying and holding low-cost index funds. It is simply playing the odds, and taking the emotion out of it. which in the end is almost always smarter. Even if it is not as inspiring as a lanky corn fed North Carolina Farmer taking his team on his back and winning the series one 93 mile an hour cut fastball at a time.

* Beane has had truly remarkable success with his A’s despite one of the smallest payrolls in the majors.  He has done more with less than other GM in baseball.  In this way he is really akin to Ben Graham, the legendary value investor who was Warren Buffet’s mentor.

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6 Responses to “The Chosen One”

  1. Dennis October 30, 2014 at 10:57 pm #

    Congrats to the Giants. I have to say that the 2002 World Series was my favorite. Baseball is an incredible sport.

    • Miles Dividend M.D. November 2, 2014 at 11:03 pm #

      Prior to 2010 that comment would have really hurt!

      AZ

  2. RMF325 October 31, 2014 at 8:09 am #

    Another native San Franciscan (7th generation native Californian) and huge Giants/A’s fan here. Madison Bumgarner was genius on the mound in this series, but especially in Game 7. He’s been in the shadow of other pitchers (Matt Cain and Tim Lincecum in particular) in the last few years, but he has been incredible this season. Like his teammate and fellow Southerner Buster Posey, MadBum is low key, unpretentious and frugal. These two play brilliantly and keep quiet about it; no splashy lifestyles. They will not end up bankrupt in 20 years time. There was a really lovely story about Madison and his father, Kevin in the New York Times yesterday (http://www.nytimes.com/2014/10/31/sports/baseball/world-series-2014-madison-bumgarner-sf-giants-ace-is-product-of-north-carolina-and-proud-father.html?ref=sports&_r=0) that made clear how very well grounded he is emotionally. A rock solid young man.

    I too loved Moneyball (the book and movie), and really hope that Billy Beane gets a World Series ring, and soon.

    Can’t wait for opening day 2015!

    • Miles Dividend M.D. November 2, 2014 at 11:04 pm #

      Loved that article. After reading it, even a lefty like me had to admit that great things come from Red counties.

      AZ

  3. mo ashori November 2, 2014 at 5:02 pm #

    I actually don’t watch baseball but it’s great reading the analogies. I was just reminded of another great baseball analogy in chapter 6 of Bernstein’s book The Intelligent Assest Allocator.
    I guess the fun disappears when one just buys and holds but so far it has been the only method that has worked for me. after several years of trying to time the market I feel that indexing is going to work out well for me.
    Have you made any recent changes to your own portfolio?

    • Miles Dividend M.D. November 2, 2014 at 11:25 pm #

      Mo,

      Buying and holding is the single best approach, all things considered.

      I have converted my entire retirement portfolio to a low cost S&P fund which I am managing using a dual momentum strategy. My feeling is that this approach is behaviorally easier for me and I believe it will decrease future drawdowns to between 15-20%, based on backtesting. We’ll see.

      For taxable I am still buy and hold 75/25 with Betterment with the tax loss harvesting algorithm on. It harvested over $500 in the most recent downturn, which should save me at least $250 in taxes come tax time. I am convinced there is no better approach for taxable accounts above 50K, than Betterment.

      Keep the faith.

      AZ

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