Moneyballing the Financial World

In Michael Lewis' 2003 book and Columbia Pictures' 2011 movie of the same name, the audience meets Moneyball -- the term that Lewis gives to a new approach for the better measurement of baseball talent and performance. The approach is adopted by a nonconformist general manager, Billy Beane of the Oakland Athletics, who proves over the course of the book and the movie (and the years that would follow) that Moneyball leads to better baseball analysis, and ultimately better baseball. "If you can't measure it, you can't manage it," the old business saw runs, and so as baseball's measurement tools have improved, its management decisions have improved, and the world -- here, the world of baseball -- has gotten smarter, more competitive, and better.

I'm a big Moneyball fan (I have previously written a bit about my own baseball background). My first published paid pieces -- before The Motley Fool ever existed -- were about sabermetrics, the study of baseball statistics. Specifically, I was urging the founders of fantasy baseball (Rotisserie Baseball, it was called back then) to select better statistics for fantasy baseball leagues. Eventually, I traded in my sabermetrics hat for a belled cap and have never really much looked back. 

Until now.

The more I live and breathe as both a professional investment advisor and as co-chairman of an 18-year-old Internet company working to help the world invest better, the more I am convinced that the world of finance has a critical lesson to learn from the world of Moneyball. And the longer we go without learning it, the poorer (in every way) we shall all be.

"What's his on-base percentage?"
Part of what makes baseball so interesting and compelling to lovers of numbers is that it is scored. The runs are counted, of course, inning by inning, but it's way more than that. Every pitch is noted, analyzed, documented. Every swing, and every time a hitter doesn't swing, is noted, analyzed, documented. In the world of baseball we can find every player's stats, every team's stats, every stat throughout most of baseball history, at this point. Everyone is scored, rated, ranked. Even minor-league players, even college and increasingly high school players, operate under the same conditions -- under a microscope.

No game of consequence is played without at least one official scorekeeper noting in his scorebook (or maybe an iPad these days) everything that is happening. And if the scorekeeper sneezes, or spends too long in line at the hot-dog stand, there are any number of other fans in the stadium with scorebooks of their own. In the computer age, all of those statistics and rankings are moving from score pads into clouded databases, cheaply and conveniently accessed by anyone who cares. And all of this culture of scoring, of performance mattering, is exactly what sets up the conditions whereby Moneyball can work its magic -- better analytical decisions can be made only by collecting and aggregating data sets. The magic of Bill James (the real revolutionary, whose original ideas were basically just being enacted by Billy Beane and the rest of his generation) -- the magic of Bill James, I say, can be magical only if baseball is being scored.

"What's his on-base percentage?" we can ask of any hitter in professional baseball. And there is an unambiguous, insightful, and telling answer.

I'm writing this article today to present my love of baseball and Moneyball in direct contrast to my extreme distaste for the complete lack of scoring heretofore in a far bigger game: the money world, the world of finance and financial predictions. Compared with a scored, rated, ranked baseball world, the world of financial predictions is in a Dark Age. Swings being taken, in the form of financial predictions by modern-day analysts, are completely unaccounted for. Almost no one is scoring what is said in Barron's or on CNBC, few statistics if any are being gathered, and "fans" can't tell who's good and who's bad.

Even worse, fans don't even seem to be asking for scoring and accountability. As a result, even the most ardent fans cannot determine who are the good and the bad players in the money world. Again, baseball is so scored and accountable that we can quickly glean even meaningless statistics; any casual fan can click into the Internet right now to find a benchwarmer's stats from last season hitting on artificial turf in night games. In the much larger and more important world of finance, with real dollars on the line in every instance, you and I can't find the most basic meaningful stats on even the biggest and best-known players spouting financial predictions through every media channel. 

How's that workin' for ya?
So how's this darkness playing out for us? As I wrote earlier, "If you can't measure it, you can't manage it." If no one is taking the time to hold people accountable for their Dow Jones predictions in The Wall Street Journal or a hatchet job (rightly or wrongly) on a new IPO in BusinessWeek or on the Fox Business Channel, the system doesn't improve. The audience doesn't get smarter and more discriminating, this weak demand fails to create a better supply of information, and media channels lack any incentive to provide quality information and predictions. 

So as we close out another year rife with New Year's 2011 financial predictions that no one remembers, and New Year's 2012 financial predictions that few if any will retain, we are left with this: No one's counting the plate appearances. None of the uniforms has a number or a name. There is no scoreboard in the stadium at all. We have to stretch our imaginations to picture what that would look like in baseball, and what that would do to baseball. But in the world of finance, that is the status quo playing out with chilly, dull, gray repetition every day, and every year, to the next.

I predict things are about to change. In my next article, Part II, I'm going to reveal how we Fools are going to work together to bring Moneyball to the world of finance in 2012 and beyond. And as a consequence, we will truly fashion out of that accountability a better, smarter, truer, and richer world of tomorrow.

Read the rest of the "Moneyballing the Financial World" essay here:

David Gardner is the co-founder and co-chairman of The Motley Fool. You can see David's CAPS score CAPS score and his Fool profile.


Read/Post Comments (41) | Recommend This Article (136)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2011, at 4:34 PM, TMFBreakerForce wrote:

    Amen brother! Great article, David. I look forward to part II.

    Best,

    Matt

  • Report this Comment On December 21, 2011, at 6:09 PM, 1wayout wrote:

    Here's my vote to keep score on all those analysts, pundits and others who make predictions - or change their predictions from day to day - on any stock or topic out there.

    Right now, for individual investors, it's like swinging in the dark...with your eyes closed and the helmet on backwards.

  • Report this Comment On December 21, 2011, at 6:24 PM, diverdon56 wrote:

    I like this idea. But, I think Hulbert has a good start on it with his financial digest.

  • Report this Comment On December 21, 2011, at 6:35 PM, Kiffit wrote:

    Very good thinking. Take a free home run.

  • Report this Comment On December 21, 2011, at 6:49 PM, wintrwman wrote:

    I am thrilled by this possibility just as I was by watching the movie. Thrilled by the thinking outside the box. And to think this info is-and has been-available to us for a number of years. Bring it on and let's hold responsible in fact those pundits and companies who have been lining their pockets with slick and shiny rhetoric. Since the SEC is sketchy in its oversight perhaps we all can do that ourselves.

  • Report this Comment On December 21, 2011, at 6:53 PM, FreethinkerKW wrote:

    Give me a 38 oz. Louisville Slugger to whack the knees of the first analyst who cries you're not being fair to them, Dave.

    This is a fantastic idea!

  • Report this Comment On December 21, 2011, at 7:18 PM, TMFDukenewkirk wrote:

    I'm assuming this train of thought is what, at least partially, inspired Motley Fool Caps. As far as Fool tools go, the two things I seem to me most instinctively focused on are my Scorecard performance relative to the S&P, as well as my Caps performance, where I actually have simply loaded it with my holdings. I do this to see long term how well my portfolio performs vs analyst picks (as you guys have included those) and even those who just play and have fun with Caps playing day traders.

  • Report this Comment On December 21, 2011, at 7:45 PM, LouisFBrooks wrote:

    I just finished reading this book a few weeks ago and even for someone who is not a baseball fan I found it fascinating. I will be waiting to see where this article is leading. It should be interesting.

    Thanks,

    --louis

  • Report this Comment On December 21, 2011, at 8:35 PM, Johnlatasa wrote:

    In truth Moneyball was a dismal failure in Oakland. The strategy of drafting high on base percentage college players produced one bad draft after another. Here is a link to the movie review from a publication that understands the real story:http://www.baseballamerica.com/today/majors/news/2011/261238...

    The 2002 team was largely put together by Sandy Alderson, although Beane did a good job of adding some parts during the season. I think the real lesson here is avoid fads in baseball or investing

  • Report this Comment On December 21, 2011, at 10:32 PM, WeWereWallStreet wrote:

    Interesting article, David. We guess one of the challenges is to put some boundary around whatever you define as your population (eg, we hope you'll ignore smart-alecs like us), but some handy way and place to check "stats" should be helpful and interesting.

  • Report this Comment On December 21, 2011, at 10:59 PM, TigerAnalyst wrote:

    Very interesting. Sports economics is something I've studied at length and the moneyball approach applied to investment professionals has merit. I'm looking forward to seeing what you have planned in part II.

  • Report this Comment On December 22, 2011, at 12:06 AM, sliderw wrote:

    Thanks for spotlighting this severe problem!

  • Report this Comment On December 22, 2011, at 1:02 AM, RallyCry wrote:

    Hi David,

    I also enjoy baseball as a player/student of the game for 23 years and I support the idea of breaking free of conventional wisdom.

    The one concern I have in adopting a moneyball approach to investing is if large hedge funds and institutions review the data and see Fools outperforming the market, they may embrace these unconventional approaches as part of their strategy. Over time, it is possible that the market will adapt on a wide scale to your discoveries and the unconventional may become conventional.

    In baseball terms, when the Red Sox and the Yankees look at things like on base percentage and value over replacement player, it enhances the value of a bigger payroll because they can pay more for these assets and close the mispricings small market teams exploited previously. In short, less frequent and more expensive oppportunities for small-market Fools.

    The edge the Oakland and the Minnesotas of the world enjoyed now must be reconfigured. The Fools better keep innovating!

  • Report this Comment On December 22, 2011, at 1:42 AM, ksiu1 wrote:

    Great perspective... people really aren't being held accountable for what they say or "predict. Definitely looking forward to part II.

  • Report this Comment On December 22, 2011, at 7:35 AM, Clint35 wrote:

    I think it's a great idea David. In fact I think most market prognosticators you see on tv need to learn to just shut up. Most of them are usually wrong. If they were held more accountable, they would learn to quit making predictions and flip-flopping on their stock calls so often. I've noticed when people on CNBC make predictions no one ever follows up six months or a year later to let us know if they were right or not. I'm willing to bet they're usually wrong.

  • Report this Comment On December 22, 2011, at 7:58 AM, jesterhat12 wrote:

    Excellent! I've long-wanted to do exactly this. To hold accountable, by name, those in financial world.

    This first occurred to me when I was looking at mutual funds back in the day. (I was then told that the way you invest is by buying mutual funds through a full-service broker.) I wanted to know who the best money managers were, but I could only find the information that the money managers were putting out about themselves, not information from a detached party.

    I could find no information about how they had done in the past, managing other funds. I could find no record of their corprate experience...

    Frustrated, I resolved to try to find a way to gather and publish this information online for everyone to have access to, especially after I learned about the people cooking the books in large corporations that went bankrupt - the people that did those things then went on to other jobs...perhaps doing exactly the same thing?! We need to have their past misdeeds tied to their names on their Google results!

    We also need to be able to tell who the most adept stewards of others' monies are so that capital can flow to them efficiently.

    I gave up in my own attempt to realize this goal of crowd-sourced accountability in finance when I started to realize the scope of my goal.

    I hope that the Motley Fool can accomplish what I could not. I'm in to help out, at any rate!!

  • Report this Comment On December 22, 2011, at 8:24 AM, texasflyfish wrote:

    More great wisdom from David Gardner. A long time ago, I used Hulbert as he tracks the financial newsletters. But it was expensive. Now I don't watch any TV analysts as most of them are worthless. I rely heavily on the Motley Fool because you can track every recommendation (long or short). If I read something in the Wall Street Journal, I take it with a large grain of salt until I see the same idea or company discussed online at MF. It is a great idea, David, but with the Motley Fool who needs to even listen to those untracked talking heads!

  • Report this Comment On December 22, 2011, at 8:28 AM, clarkmel wrote:

    Forget predicting markets. Let's score the predictions of economists. They're basing public policy decisions on their predictions. They're risking the lives and livlihoods of millions of citizens on their prescriptions. And, there's no evidence that their predictions are better than yours or mine.

  • Report this Comment On December 22, 2011, at 9:31 AM, jayusdeeus wrote:

    I have always believed there are undeniable parallels between playing fantasy baseball and picking stocks. You research well, use the courage of your convictions to draft/pick, patiently evaluate your selection and continue to select other complimentary pieces. It was my experience playing fantasy baseball in many ways that gave me the confidence to manage my own portfolio (with the indispensible help of Motley Fool, of course).

    jd

  • Report this Comment On December 22, 2011, at 9:56 AM, NozRydr wrote:

    The lesson I took from Moneyball was to cut through the piles of stats and concentrate on the short list of stats that really predict performance: the first order effects if you will. i.e. Parsing the plethora of 10-k stats what is the analog for base percentage in a company's financials? ROE? Free Cash Flow? What is the moneyball number(s) to pay heed to?

    re: Analyst forecasts

    They used to stone false prophets didn't they? /heh/

    I'm not sure if more accountable and accurate analysts and therefore a more efficient market works in my favor. :)

  • Report this Comment On December 22, 2011, at 10:03 AM, JBKirtley wrote:

    David, Pitching this kinda heat will have them bailing out the box while we step in to go yard!

  • Report this Comment On December 22, 2011, at 10:15 AM, DJDynamicNC wrote:

    I couldn't possibly be more in favour of this.

    The only thing similar I've seen has been the occasional study on pundit accuracy, such as the one from Hamilton College: http://www.hamilton.edu/news/polls/pundit

    Unfortunately, such efforts are few and far between. Kudos to the Fool for looking to bring some sunlight to an area that seems to thrive in hidden darkness and obfuscation.

  • Report this Comment On December 22, 2011, at 10:18 AM, Merton123 wrote:

    David - you are right that the more objective the investment process the better result. I believe that it helps creating a story with the numbers. For example why does the increase of price of rice effect Budweiser stock? Budweiser is the largest consumer of rice in the United States - one of the inputs to making beer per one of Motley Fools articles.

  • Report this Comment On December 22, 2011, at 10:46 AM, blesto wrote:

    CAPS is already a step in that direction, ain't it?

  • Report this Comment On December 22, 2011, at 11:31 AM, SF321 wrote:

    In the proud tradition of uninformed assumptions, I predict that the Fool is launching a PolitiFact - style feature dedicated to rating the performance of financial pundits and analysts.

    And if I'm wrong, please do it next year.

  • Report this Comment On December 22, 2011, at 12:05 PM, DMCSween wrote:

    David,

    Great idea - I look forward to part 2.

    One thing... I listen to the weekly/daily podcasts and there is often a section whereby the speakers talk about "stocks on their radar" or "yes, no & maybe so stocks." Whereas, I know these are NOT formal recommendations - I'd love to see a section of the fool.com website devoted to tracking these commentaries on a long term basis. It would do exactly as you say - it should lend more (or less) credibility to the presenters. Just an idea....

  • Report this Comment On December 22, 2011, at 1:13 PM, glake1 wrote:

    Great article, I look forward to part !! Merry Christmas, Gilmour

  • Report this Comment On December 22, 2011, at 3:16 PM, DRWHISKEY wrote:

    I took Hidden Gems to task when Tom Gardner had envisioned 15% annualized returns for the small cap newsletter, suggesting that it was a totally unrealistic return to target or put out their as some kind of achievable goal under the two picks a month club.

    I even wagered a large bet it would never happen--the 15% CAGR under the format. I was right.

    Should we start by moneyballing Tom G?

  • Report this Comment On December 23, 2011, at 4:43 AM, blesto wrote:

    Maybe the Fool could start a Analyst ratings service in the vein of Standard & Poor's, Moodys , and Fitch.

    Charge analysts for a rating. ;)

  • Report this Comment On December 24, 2011, at 5:49 AM, 0401amigo wrote:

    Thanks Tom,

    Maybe Michael Lewis could write a book on the biggest scam of the nw millenium titled "The Snake Oil Salesman who sold us Y2K"

    It was a farce and because gov. pundits, jounrnos and the media bought in we hear nothing!

    What a joke!

    Amigo!

  • Report this Comment On December 25, 2011, at 8:38 PM, deadcatbounce09 wrote:

    I think this is a great idea. I've been a little concerned about the growth of MF. From their twitter feed it seems like they have been on a hiring spree lately. I first subscribed years ago when there were only a handful of newsletters and analysts and it seemed like the recommendations were much more consistent and the service was more in line with my interests as a small investor. My last go around with the service gave me a bunch junk from China and a few other stocks that I wish I hadn't purchased. Now I don't put too much credence in anything I read from them (except for a few of the people I've come to respect....Jeff Fisher, David Gardner etc.)

  • Report this Comment On December 27, 2011, at 5:09 PM, mtprx wrote:

    Nice try David but let's remember the invisible fleece these people can hide behind. One of the main reasons no one gets successfully prosecuted is that you most conclusively show INTENT. A fore-thought not an after-thought. Everyone of these slick charlatans can say that they never intended any harm for their clients and sans proof otherwise we get the result we get. Yes, I too would like a way to judge the veracity of the advisers but alas all you will end up doing is scoring them based on their results and can you hear this coming..."pat results are not an indication of future performance." In a fair game of dice, roll the die yourself!

  • Report this Comment On December 29, 2011, at 2:44 PM, TMFSpiffyPop wrote:

    Fellow Fools, I will be publishing Part II next week. I had initially thought it would be this week but... then I remembered that it was the holidays! Thank you for all the excellent comments above, some of which have already shaped (and may find there way into) next week's Part II.

    Happy Fool Year, all! --David

  • Report this Comment On December 29, 2011, at 10:59 PM, Truth2Power wrote:

    Saw this, ironically, the day after I yanked out my December 6, 2010 copy of FORBES (the "Investment Guide" issue) and checked the performance of the stocks mentioned in an article suggesting a batch of aerospace stocks that would "have a high degree of certainty" for "strong EPS growth in 2011/12." Let's just say that he's lucky he included the "12" in his prediction (lucky for now, anyway).

    Can't wait to get started!

  • Report this Comment On December 30, 2011, at 12:04 PM, TMFBreakerTAllan wrote:

    This is a look at why the prediction market is what it is.

    http://www.freakonomics.com/2011/09/14/new-freakonomics-radi...

  • Report this Comment On December 30, 2011, at 3:14 PM, cobbiejones wrote:

    why dont you fools manipulate the data yourselves. goto sec.gov get a company's 10k and figure out the metric you want (assuming no fraud). stock price is the only other thing you need. stop being lazy and looking for the simple answer. open a few books, read them, and then you will to be enlightened to all the moneyball metrics of the financial world.

  • Report this Comment On January 09, 2012, at 6:44 PM, Robdouth wrote:

    JohnLaTasa is dead wrong about the affects of Moneyball on the A's and shows a basic misunderstanding of what it is. The idea was that they didn't have a lot of money to spend. Whether or not the draft was successful at producing stars was never the point. The point was that they couldn't pay star dollars, so they drafted players that were not valued by other teams and were undervalued on the market. This doesn't mean they found a Pujols that no one was looking for. Also the fact is that for the amount of money they have paid, they have received more wins for their money than any team in baseball. Yes the Yankees are going to win a lot of games with a 250M$ lineup, but in 2002 they won as many games as the Yankees for a fraction of the cost. They proceeded to remain competitive over the next few years, and the problem they have is that no even the rich teams are using the same metrics (Boston, Toronto, etc.)

    It's never even been about winning per se. The idea is that you are exploiting a weakness in the market based on willful ignorance of many of the players in the market (players = GMs) Many idiotic GMs didn't want to even look at sabremetrics or even think about seeing the game or measuring the game differently. They wanted to feel things in their gut or trust their eyes, when data is what should be trusted, not some crusty guys idea of who looks like a player.

  • Report this Comment On January 13, 2012, at 4:10 PM, Classof1964 wrote:

    I have relied on the data in the Value Line Investment Survey for my stock investments. I may get an idea from the MF articles, but I prefer to see 10-15 years of data on a company as a way of inferring its culture, management style, and standing in its industry.

    I'm glad Robdouth clarified the earlier criticism of the moneyball concept and by extension Michael Lewis. I have a high regard for his work.

  • Report this Comment On January 13, 2012, at 5:27 PM, PauvrePapillon wrote:

    With all due respect to Bill James, Earl Weaver was the original "Moneyballer". Weaver was the first manager to use individual hitter/pitcher match up statistics in determining line up, pinch hit, bullpen and other player substitution decisions. He remains one of the only managers in history to realize the importance of on base percentage and outs management as well as the established statistical outcome probabilities for in-game managerial options. Most managers still try to sacrifice a runner down to second with less than two outs even though, based on results, this is not the proper percentage play.

    Bottom line: Earl Weaver was playing the percentages to win pennants and championships in the early Seventies with a small market team, limited financial resources and a less than top tier roster.

    And he published Weaver on Strategy in 1984. That's more than 20 years precedent to Moneyball.

    http://en.wikipedia.org/wiki/Earl_Weaver

  • Report this Comment On January 18, 2012, at 10:28 PM, Tayjuswee wrote:

    You hit the nail on the head!! I have always felt a lack of accountability of the "spouters" on tv and the "hacks" in print and their unfounded predictions and nobody to remind them of their fallacies.

  • Report this Comment On May 10, 2013, at 4:32 AM, becky764 wrote:

    Thuggery and forgery are nothing but threats to any kind of development whether internal or external, UNN sercurity are trying to abate it, for more details, visit http://unn.edu.ng

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