Moneyballing the Financial World, Part 2

Rarely has an article appearing on our website received such unanimity of positive replies as "Moneyballing the Financial World," published in late December. At Fool.com, we are accustomed to and desirous of hearing from the bulls and the bears, the pros and the cons. We call that "motley," and we celebrate it. In this case, my essay's urge to bring baseball-like scoring and accountability to the field of financial predictions saw virtually all bulls and no bears, all pros and no cons. That may partly explain why it was then picked up on Dec. 30 by RealClearMarkets as a top nationwide read. If you haven't read that first article, shift-click this link and take a look-see (including all the excellent comments), because it provides context to today's Part 2.

Part 1 closed out with a promise 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.

Let's do it.

1. Ask and insist ("We have met the enemy, and he is us")
As implied by my subhead's quote (credited to Pogo creator Walt Kelly), I believe the primary reason we have allowed the world of financial performance records to evolve into this opaque, benighted state is indeed because we have allowed the world of financial performance records to evolve into this opaque, benighted state.

If you are looking for who's at fault here, as the wag says, pick up a mirror. We are, all of us, feeding an anti-Moneyball financial culture whenever we do not constantly frequently insistently ask of any featured financial source the critical question: "What's his (or her) record?"

Imagine watching a baseball playoff game on Fox and the network not ever sharing any player stats during the telecast. As I said in Part 1, in baseball that would be outrageous; in finance, somehow we passively accept this status quo!

In such circumstances, most of us consequently have no intelligent sense of whom to follow; as 1wayout wrote in a comment on my first article, "It's like swinging in the dark... with your eyes closed and helmet on backwards." I believe that financial broadcasters and publishers who do not make an effort to present performance information when introducing guests or opinionated viewpoints disrespect us all.

With publication of this essay, I am formally asking you as a reader, if you care and if you want to see a "better, smarter, truer, and richer world of tomorrow" please ask, "What's his record?" anytime you are face-to-face with a source of financial advice. "Source" here and throughout this article series is meant broadly. Might be a CNBC show. Might be your broker. Might be a Motley Fool writer. Might be a frequent Yahoo! poster haunting a discussion board on a given ticker. Might be whoever is in the next Barron's roundtable.

"What's his (or her) record?"

2. Build your own statistical record ("There's this thing called the Internet...")
In our office, I was asked last week, "What is the best way to teach your kids about investing?" Easy answer: Get 'em swinging, and help 'em score it. In both baseball and investing there is no substitute for taking real swings that matter.

I got my own kids started picking stocks on an open platform our company launched in 2006 called Motley Fool CAPS. CAPS enables any person or source to self-score -- to keep and share investing stats on yourself at whatever age. You take the actions; CAPS does all the hard work of logging a complete record of every stock market prediction or call or hunch you have. On CAPS, many, many Motley Fool members have for one or more stocks indicated whether they think that stock will beat or lose to the market, over a specific time period of their choosing, providing their reasoning in as few or as many words as they like. Every such swing taken on CAPS -- and every player making one -- is scored, rated, and ranked. Part of the full historical record. (Just like every swing in Major League Baseball.)

If this sounds like product placement, that is not my intent. I am here working every day to help the world invest better; I will be the first to shine a light on any tools or sources that do just that, on our site or anyone else's. So if you know of any platforms, tools, or systems that do what CAPS does better than CAPS, use them! (And share them in the comments box below.)

The more than 100,000 members who've taken one or more swings on CAPS are doing something that most Wall Street professionals and financial media companies are not doing. We -- even my kids -- have scorecards. (Here's mine.) Nothing exclusive about this -- the opportunity to perform in this stock-picking arena in front of the world, and have the game keep score for you, is freely accessible to anyone who invites it today. Everyone who does is creating a smarter, richer, and more accountable world, and further showing up every professional source that resists this kind of scrutiny. 

Which financial source in the future are you more likely to select, one that has a transparent, voluminous, winning, and publicly available statistical record... or one that does not?

3. Study, and help us keep stats on, the players you know ("Track yer broker!")
First, we covered asking and insisting that any serious source that wants to be relevant and consulted should show a transparent record. Second, we covered how easy and enriching it is for you -- and really anyone -- to build your own such performance record. Third, I want to key into another reader comment included below my previous installment, namely from wintrwman, who wrote, "Since the SEC is sketchy in its oversight perhaps we can all do that ourselves." Exactly.

What's to stop you and me from typing in Wall Street's upgrades and downgrades that investors constantly hear about ("Credit Suisse downgrades XYZ to sell, citing valuation concerns," etc.?) Guess what? That's exactly what we have been doing on CAPS since 2006. Ever wondered whether you should listen to UBS more than Rodman Renshaw? How about Barclay's Capital versus Goldman Sachs? There are huge differences in the performance between these sources -- you have to click those hyperlinks to find out. At a lower level, what about Tobin Smith on Fox News vs. Jim Cramer's Mad Money calls on CNBC? We have those, too. (For more on how CAPS works, read its help section.)

But it's a great big world out there, and despite tracking hundreds of sources, we don't have them all. We don't have every person quoted in The Wall Street Journal, and we don't have your personal broker. We also don't have your Uncle Larry, who was always full of stock picks but you were too young to tell if he knew what he was talking about. Well, going forward, now you can know all these kinds of things. Create additional scorecards: Track the sources you care about. I suspect even more people would walk away from mediocre brokers if they only had a CAPS scorecard tracking the performance of their picks...

We dream of a day when every financial source tracks itself publicly and transparently, self-administered. With publication of this essay, I formally invite any source to use CAPS (or any other tool of choice) to track its performance for public edification and benefit; take over the CAPS scorecards we're paying to maintain for you!

Till next week
Do you believe our world and its financial advice will be strengthened with greater awareness of the actual performance records of everyone from Wall Street banks to acclaimed economists to talking heads in suits? Do you want to help us make that happen? Great! I've highlighted three steps to get you started:

  1. Ask, "What's his record?" constantly, and ignore advice from sources that don't provide them.
  2. Be self-accountable and learn about investing by building your own track record -- you'll get smarter, and you'll show up all those professionals who are avoiding doing this.
  3. Help us build our ratings database by adding your own sources (you can even volunteer to help us, if you like). 

I'm not content to end this series after Part 2. In Part 3 next week, I will introduce, highlight, and explain a new editorial feature that The Motley Fool is pioneering here in 2012 that brings a lot of the points above together into real-time Moneyball present on our site. See you next week.

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 and his Fool profile.


Read/Post Comments (22) | Recommend This Article (86)

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 January 05, 2012, at 5:52 PM, talan123 wrote:

    I have given up on their past performance predictions.

    What I want from an analysist is someone who can explain to me step by step why they are making the choices they are making. If they start to tell me it's too complex or such then I know it's too complex for them as well.

  • Report this Comment On January 05, 2012, at 9:02 PM, FREDandLISA wrote:

    I applaud this direction in clearing the air for financial prognostication. It is though, just one step to improving the financial environment.

    I would also suggest that the same could be done of the members of the "Boards" of public companies and possibly some of the top executives. For far too long, Board members have been allowing (or reaching) decisions that affect both the owners (stock holders) and company employees’ adversely, while they see no penalty. Names that empower “MF Global” types of failures would be worth knowing should they appear on a future list as a possible board candidate, or were on a board of a company that you currently hold.

  • Report this Comment On January 06, 2012, at 1:30 AM, sliderw wrote:

    Your problem statement was perfect. Your CAPS-based solution, not even close.

  • Report this Comment On January 06, 2012, at 11:25 AM, Brent2223 wrote:

    The only issue is that the link between past performance and future performance is much stronger in baseball than the financial world. Baseball is skill based, and the base skills don't vary too much year over year. The stats are completely controlled by the player, and are black and white. Can't accrue for some hits that 'will happen, trust me', lend some homeruns to someone else in exchange for a few more stolen bases, or try to hide some strike outs in an off shore sub.

    In the financial world, even the best advisors are dependent on external factors to be successful - from management of the company, macro economic trends, natural disasters, crazy politicians, regulatory changes, etc. I'd compare advisor stats more to baseball team stats rather than individual player stats (advisors and teams, both depend on others to be successful), and team performance can swing much more than player stats (ie how many teams load up on free agents to 'buy' their way to a few more wins) Past advisor performance is only one component of successful investment decisions, it's never going to give you the full picture.

    I definitely support increased disclosure, I just don't know if this idea would be of any value to the individual investor. I think you'd get more bang for your buck pushing for better corporate reporting so that individual investors can rely on the numbers and not need a team of professionals to deconstruct the numbers to get the true picture. Now is the chance to do this too, with IFRS still in its early stages.

  • Report this Comment On January 06, 2012, at 4:01 PM, racchole wrote:

    After reading the arguments against the benefits of a transparent, CAPS-like track record, I think that too many people are focusing on the surface benefits instead of the real change this type of transparency can lead to.

    On the surface, track records don't tell the whole story. Perhaps external factors were too overwhelming to beat the odds for a usually-prophetic financial adviser. Whatever the case, an adviser/broker's track record will leave out a lot of important elements needed for judging a persons abilities.

    However, there is very profound change that can come of this type of public exercise, and I will get right to the point: it is possible, by having all of these "track records" in one, easy-to-access location, people will begin to realize that financial responsibility is more often than not best handled by the individual and not by a broker/adviser. Perhaps, this type of exercise would educate a lot of people into realizing that they can do just as much (if not more) with their money by themselves without the need for outside assistance. Perhaps this type of exercise would shrink the demand for worthless advisers and brokers and give a boost to individual investors' confidence. Let's face it: a lot of people are scared by the market and turn to advisers and brokers because they have been misled their entire lives into thinking that they should not be making their own investment decisions.

    Maybe that is just wishful thinking coming from an Average Joe who learned that financial responsibility can be accomplished on your own. And wishful thinking that more people would open their eyes to see the wonderful upside of the stock market.

  • Report this Comment On January 06, 2012, at 6:07 PM, ATX100 wrote:

    Hypocrite !!!!!!!!!!!!!!!

    MF posts cumulative returns only.

    Where are your 1,3,5,10yr annualized returns?

    Publish them. Post them. Be transparent.

  • Report this Comment On January 06, 2012, at 6:13 PM, ATX100 wrote:

    Further, that "COMPARE SERVICES" button on the home page should show the annualized returns - not the prices for the newsletters

  • Report this Comment On January 06, 2012, at 7:40 PM, TheDumbMoney wrote:

    The best solution is to focus on the actual reported records of hedge-fund managers and others. "Analysts" talking on TV are worthless, and there is no point even tracking them except to show they are worthless. (Based on my CAPS score, I too am pretty worthless, but that's another story.) Turn off the TV and close the website if the person isn't posting his/her returns.

    MUCH better than caps is a spreadsheet maintining each and every purchase and sale. Here is one I am in the process of building, though it is HIGHLY incomplete:

    https://docs.google.com/spreadsheet/ccc?key=0AtmpZwwB9-BcdHF...

  • Report this Comment On January 06, 2012, at 7:52 PM, mtprx wrote:

    Buy low...Sell High. The only effective way to execute this strategy is to buy during bear markets and sell during bull markets, but who has the discipline for that. Oh! the truly great investors do. Any names come to mind?

    If more people were willing to collect pebbles instead of hoping to land a boulder, expectations would be grounded in reality and not the fantasy of striking it rich overnight.

    Just think how many people are living off of that "1% of assets under management fee" that is so frequently charged on our accounts.

    It is really the fault of the individual investor who for some reason will not demand a clear and honest explanation of just what he/she is buying that drives me crazy. Go ahead... roll them dice, maybe this time it's you're turn to win...not!

  • Report this Comment On January 07, 2012, at 2:28 AM, daodell33 wrote:

    Sounds like a new, exciting business model for a brokerage service . . .open, transparent, statistical meritocracy on broker / brokerage performance. Sounds a little like CAPS but more profitable . . . .David . . . where are you going with this?

    I'd invest!

  • Report this Comment On January 07, 2012, at 6:25 AM, BoiseKen wrote:

    Brent2223 wrote:

    "The only issue is that the link between past performance and future performance is much stronger in baseball than the financial world. Baseball is skill based, and the base skills don't vary too much year over year ... In the financial world, even the best advisors are dependent on external factors to be successful"

    I very much disagree.

    1st, baseball -- a sport I love -- Your stats might predict how you will do over the next year or two, but they will decline with age. It is not a super long-term predictor.

    2nd. financial -- those external events ARE tracked by CAPS as well. CAPS measures advisers vs. the S&P500. If the market drops 50%, CAPS measures you vs. that drop. If it rallies , same deal.

  • Report this Comment On January 07, 2012, at 12:22 PM, aacole wrote:

    I generally do not place as much emphasis on the analyst's record as I do the cogency of his/her argument. This is because it is often hard to gauge how much an analyst's "spin" on a stock or investment idea is based on his/her personal need to convince me and how much of it is based on a true conviction that what they are saying is true. Therefore, I will generally discount any argument that is not quantitative in nature, complete and as well, discuss the downside risks.

    Sure, I agree that David is correct about the importance of his argument regarding tracking results, (much more important for the executives who run the companies we own than the analysts we may or may not listen to) but one would remiss to not listen to a good ideas, no matter who or what their source is. Discount ideas based on track records of speakers but one should rarely if ever dismiss stock ideas solely based on the weakness of the source. Remember that it is precisely picking companies that are out of favor that is the goal, and some of that is based on being open to "unconventional" thinking.

    What I would like: Is an opportunity to use is a stock screening tool that allows me to search stocks based on the criteria your differing newsletters use -- like dividend payout ratio, free cash flow, etc. Seems like although many search criteria are there, not the ones you are recommending we use to find the diamonds in the rough. That would be truly helpful.

  • Report this Comment On January 07, 2012, at 1:33 PM, TMFBomb wrote:

    @dumberthanafool,

    Loved your comment. I applaud your willingness to share your personal tracking spreadsheet.

    Fool on,

    Anand

  • Report this Comment On January 07, 2012, at 2:11 PM, JGBFool wrote:

    My problem with this approach is my own CAPS score. I don't think my company valuation skills are actually 95th-percentile.

    I would say I'm marginally better than the average trader, mostly because of two things. First, I am getting better at ignoring market "noise" that isn't based on actual solid news and earnings reports (my Chinese stock holdings are testing my resolve in this, though). Second, I suspected that in early '09, that if the multitude of ridiculously-depressed stocks weren't solid buys, then the only good investments would be stockpiles of canned food and bullets.

  • Report this Comment On January 07, 2012, at 3:37 PM, RallyCry wrote:

    I think CAPS has many great conceptual features such as comparing picks to relevant indicies, however I think their are a few inherent disadvantages in using CAPS to track performance. It is a construct that is not a perfect substitute for an individual brokerage account.

    Until recently Covestor allowed people to track automatically real life holdings, trades, and performance made in individual brokerage accounts through its personal track record service. They are now terminating this feature, becoming an asset management company composed of "model managers" and referring people to Blueleaf to automatically track trades and performance.

    CAPS should begin offering automatic trade tracking to "Moneyball the Investing World" . This would overcome limitations such as the 5 day minimum holding period in CAPS since real life investing does not have this same limitation. Most investors have access to cash or margin in their accounts to trade everyday if they are so inclined. The other limitation automatically tracking accounts would resolve is the 30 minute lag between opening and closing picks. Buy and sells happen in real time and CAPS should mirror the start and end prices in real time. There are too many open and close prices left to chance in CAPS today .

    CAPS should feature some penalty or price adjustment for boosting accuracy by closing losers and reopening immediately. In a brokerage account, this would be captured by higher trading costs and wash sale rules to revert back to the original purchase price. Another item is opening up CAPS to mutual funds. Many fund managers will park a big chunk of capital in an index and use a small portion of the portfolio in attempt to outperform. Mutual funds are readily available in brokerage accounts.

    If we can link our accounts to show what is really happening, I think we will be much closer to reaching the goal of transparency. Not to mention It takes much thicker skin to short 50 triple short ETFs in a personal brokerage account when the results could be disasterous. This is the definition of accountability.

  • Report this Comment On January 07, 2012, at 6:24 PM, Sunny7039 wrote:

    I was really curious as to what the "advice" would be -- and gosh, but wouldn't you know, I should have guessed. The first step is to blame myself. Well, the first step is always to blame oneself. You know, as if this were Alcoholics Anonymous.

    We should insist on knowing past performance? I don't expect the general investor to know about Hume's Problem of Induction, but I surely thought everyone had read and pondered Nassim Taleb's two popular books, which lay out clearly why past performance may not only fail to be a good indicator of future result, but can harm you very seriously. The very first post on this thread shows cognizance of that fact by demanding an explanation of reasoning, not simply track record, and several more echo that. After all, track record could have been due to all sorts of contingencies, including a big dose of pure chance. I want to know method -- and methodology (as in, how did you arrive at this method, and what are its limits).

    There's a deeper problem here. This article begins to address it:

    http://www.rollingstone.com/politics/blogs/taibblog/iowa-the...

    And as far as brokers are concerned, I have never met a soul with access to a talented broker who does not already have $10MM in net financial assets. Of course, we can't be sure that my experience is typical of others, or that the future will conform to the past. Except that it's articles like Taibbi's that make a good case for believing that experience is likely to happen again . . . and again and again.

    Anyway, it's always best to keep in mind that no one cares as much about your welfare as you do. That is a good place to start. Another important point is that others frequently don't want you to do well, even when their job is to help you do just that (!) I don't know why this is, but it is something you need to keep in mind as well.

  • Report this Comment On January 08, 2012, at 11:09 AM, naandrews wrote:

    David,

    With your stress on accountability, I must ask: why should Fools continue to subscribe to those Fool newsletters that are underperforming the market? Hidden Gems, Global Gains, Options and Pro are all underperforming. At what point--how many years does a newsletter have to be in existence, for example--before we have to ask for accountability in newsletters that underperform?

    Neil

  • Report this Comment On January 09, 2012, at 12:38 AM, HistoricalPEGuy wrote:

    Analytics! If you don't know the term, learn it. Businesses around the world are generating huge profits from it. If you aren't using Analytics to help run your business, your investors will soon demand it.

    Big kudos to David and The Motley Fool for innovating now. In 10 years, all analysts will be measured this way.

    CAPS is awesome. Investing is about prediction - and there is no better way for testing your ideas than in CAPS.

    However - you'd be a 'fool' to throw money at somebody with a good CAPS score. Sadly, historical acumen is simply not a predictor of future performance. If you disagree, you are dead wrong. The probability that somebody picks winners 15 years in a row is actually rather high if you consider all stock pickers. My favorite example of this is ESPN's "Pigskin Pick'em". Every year, somebody wins over 70% against the spread. Do they have the secret sauce to pick football games? Can you go to Vegas and bet what they pick and become a millionare?

    No you can't They got lucky and so do many, many stock pickers.

    Analytics is all we have to measure, just remember that past performance is just that. Nobody can predict the future.

    - HPEGuy

  • Report this Comment On January 09, 2012, at 1:20 PM, TheDumbMoney wrote:

    Anand,

    Thanks, I'll re-post on my blog when I finish it, I'm trying to go all the way back to when I started buying stocks in 1998 (all purchases and sales), but the open positions are fairly complete at least through November 2011 (not including dividends and DRIPs since then). I also closed my 1/2013 MSFT Leap at a the $20 strike price last week for a small gross gain/net los and haven't added that yet.

    Generally:

    I didn't mean to seem overly critical of CAPS and the Fool. The system here is not perfect (e.g., I'd love to see annualized returns on the Fool newsletters, though I subscribe to none of them). At the end of the day, despite flaws, there is more accountability going on here than just about anywhere else in the market, which I why I like the site. Even 13F filings by hedge fund managers don't have to report pending short positions, though hedge fund managers and mutual fund managers do have to report annualized returns. That's why those guys (usually guys, unfortunately) are the best place to look both for ideas and general wisdom, places like Oaktree, Sequoia, BRK, Phillip Fisher books, Bill Graham books, places/people/books backed by long, long, long track-records of publicly-accountable and disclosed success.

    Best,

    DTAF

  • Report this Comment On January 11, 2012, at 5:35 PM, mtprx wrote:

    For a real insightful look at what all this can really mean, Google "what has worked in investing" and "Tweedy Browne". This paper nicely sums up some of the past methods that have brought steady gains to those that have the patience to follow these investing strategies.

  • Report this Comment On January 13, 2012, at 5:29 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 25, 2012, at 7:55 PM, mark516119966 wrote:

    Anyway, it's always best to keep in mind that no one cares as much about your welfare as you do. That is a good place to start. Another important point is that others frequently don't want you to do well, even when their job is to help you do just that (!) I don't know why this is, but it is something you need to keep in mind as well.

    Sunny you got that right. Years ago I bought into a real estate fund run by a local guy who also happened to be my accountant. He also owned a realtor company which I thought would fit quite nicely. To make it short that was my first realization that another won't care as much as I care about my money.

    As far as your statement about others not wanting you to succeed even though they are suppose to, I think about that every time I hear how some one gave out lottery tickets for Christmas presents. Can you imagine how sick the giver would be if the recipient actually won a million dollars?

    No I'm pretty sure they don't really want them to win... well not more than $100 anyways.

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