Michael Lewis is an author and financial journalist. In one of his bestselling books "Moneyball: The Art of Winning an Unfair Game," Lewis writes about how an underfunded team, the Oakland Athletics, was able to wins by 2002.
This book was published in 2003 and anyone - not just an ordinary investor - ought to read about how Billy Bean used statistics, challenged "conventional wisdom," and went against the MLB formula for running a baseball team.
I - Here are the highlights:
1. Know the end result you want
Before anything else, you should know exactly what you want. This requires thought. In Oakland A’s case, their goal was to win as many games as possible, not to retain their stars. This was because they found that the fans would come to games when the team was winning, regardless of whether or not they had their stars with them. They then aligned their strategies with this goal. They often couldn’t afford to retain their stars, but they could find ways to win more games.
2. Ask yourself: What is the Conventional Wisdom?
Now you should ask yourself what the conventional wisdom says about how to achieve your goal. List them. This is what most people think you should do to achieve your goal, and this is what the majority of people are doing.
3. Question the Conventional Wisdom
This is not easy, but this is how you can find opportunities. Your best weapon is why. By asking why you may find that:
- The conventional wisdom is unreasonable
There is simply no evidence that it works. Most likely it became conventional wisdom because some people said so. In baseball for example, the way people count things can be traced back to a different game: cricket. Because the man who improved the box score in 1859 was familiar with cricket, he brought the ideas to baseball without thinking about whether or not that was the best way to count things in baseball. - The conventional wisdom is not the best way to achieve the goal
The conventional wisdom might contribute something to achieve the goal, but there could be other more significant factors that are overlooked by other people.
4. Find the real contributing Factors to Achieving Your Goal
The goal of questioning the conventional wisdom is to find the real contributing factors to achieving your goal. The more different they are from the conventional wisdom, the bigger the opportunities you have. To avoid guessing, it will be better if you can find data to support your ideas. If that’s not possible, at least make sure that you use clear logic.
5. Determine the kind of Stats you Need
After you find some ideas in step 4, think about the kind of stats you need to test your assumptions and help you do things correctly. For now, don’t think about how to get the stats; you will worry about that later. Just think about the ideal stats you need.
6. Find the measurement Tools
The next step is to find the tools you need to give the stats in step 5. Sometimes the tools are available, and sometimes they aren’t. If you can’t find the tools that exactly meet your needs, just find the best possible ones.
7. Measure what you Do
The next obvious step is to measure what you do when you apply your ideas. As I said in step 5, measurement is important to make sure that your assumptions are correct and you do things correctly.
8. Adjust Yyourself Accordingly
The measurement gives you the feedback you need to adjust your actions. This way you can do the right things better over time.
Comments and Application to Investing:
Money can only be made from the stock market using the"2x2" matrix. This idea was discussed on kaChing's blog. To recap, on one axis you are either right or wrong. On the other access you are either consensus (following the herd) or non-consensus (contrarian). As Andy Rachleff describes it:
What most people don’t realize is that you don’t make money if you are right and consensus because all the returns get arbitraged away. The only way to make money in the long term is to be in the right and non-consensus quadrant.
The 2x2 matrix is the model for investors to use for financial success. The reason is that time will be better spent ignoring the direction of the market and focusing the energy challenging consensus and being right (about a company).
II - More Philosophy
While I detest hearing the philosophy from others (it is meaningless without context), I detest even more in regurgitating it. With that in mind, here are other ideas that are worth repeating from Moneyball:
1. Every form of strength covers one weakness and creates another, and therefore every form of strength is also a form of weakness and every weakness a strength.
2. The balance of strategies always favors the team which is behind
3. Psychology tends to pull the winners down and push the losers upwards
III - The Kool-Aid Market
David Rosenberg summed up the advance in the U.S. markets by suggesting various pundits are drinking Kool-Aid:
Marc Faber is the latest pundit to drink the Kool-Aid and recommend stocks over bonds, citing the Fed’s printing press — the problem here of course, is that the U.S. stock market has only recovered in devalued U.S. dollar terms. Look at the Dow or S&P 500 in gold terms, Canadian dollar terms or euro terms, and this wonderful rally basically disintegrates. It’s otherwise known as a rally based on “money illusion.”
