I recently saw the movie, "Moneyball", which starred Brad Pitt playing the roll of Billy Beane (General Manager of the Oakland A's). I must say it was one of the best movies I have seen in years. And there wasn't even anything that belew up during the two-hour movie. Nonetheless, that movie was riviting, and as a baseball fan, I remember reading and following the Oakland A's back in 2002-2003 when they were defying the odds.
But what Beane did with the Oakland A's is transform baseball in a major way. You see, we are all enamored with the home-run hitters. We associate the best players in the game with those who crush the most number of balls over the outfield fence.
Rarely does people consider a player like Alex Avila, the catcher from the Detroit Tigers with a .389 on base percentage, or Jose Reyes with only 7 home runs, managed to finished 15th in the league with his impressive OBP. Both of which are higher than Curtis Granderson and MarkTeixeira of the Yankees who hit 41 and 39 home runs (second and third best in the MLB) but neither of which got on base more than Avila and Reyes.
Or how about the guy most consider past his prime who manged to get walked 15% of the time he went at bat: Bobby Abreu, or Dexter Fowler who both managed to do the same, finishing with only 13 home runs between the two of them, yet both have on base percentages that were equal with the best home run hitters of the game.
Billy Beane understood this concept, ignored the high-priced flashy baseball players and instead fielded a team, with 'has-beens' and rejects that nobody else wanted and in the process changed the game itself.
With that said, what lessons, can be taken from what Mr. Beane did and how can we apply them to the stock market and the manner in which we trade?
1) Beane was unconventional in what he did. I'm sure, if twitter had been around back in 2002-2003, that Beane wouldn't be following a thousand people and trying to figure out what everyone else is saying about his team and how to manage it, nor was he watching Baseball Tonight on ESPN. He developed a system for evaluating players based on concrete facts (past performance) and developed a methodology for projecting their future performance. Everyone else, seemed more concerned with the "look" of the player and how many times the guy went yard.
2) Beane started with the big picture – where he wanted to be at, at the end of the season, i.e. the number of wins that he wanted in the win-column, and built his team off of that number, and what it would take to achieve that goal. He decided how many runs he would need, and how often his guys would need to get on base. And walks were worth their weight in gold.
3) Beane did not associated players with any emotions or feelings. In fact he wouldn't even fly on the team plane, so that he wouldn't get attached or have any kind of friendship with his players. He was cold-blooded and strictly business.
4) Beane didn't associate himself, or receive council from anyone in the establishment. He fired his scouts, and instead hired an economist from Harvard, that was skilled at crunching numbers and statistics.
5) Beane didn't go off of what he felt or believed. Instead he relied on the numbers. David Justice was a 'has been' with bad knees, and nobody wanted him. But Beane knew that he could get him at a basement price, and though his performance was no where near flashy, he sported an OBP% of .376 and a slew of walks (18% of his at-bats) the year Beane had him, and only had to bat .266 in order to achieve as much. Impressive!
As for traders in general, they tend to:
1) Go with what the crowd is doing. Sign up to some over-hyped subscription service, and hope that it is their 'holy grail'. They don't rely on what the charts and numbers are telling them. Instead they check first if some guru is in agreement with them. Otherwise, why keep CNBC on during the trading day. They hear of a hot day-trade that everyone is wanting to get into, or some stock that has shot up 200% and they find the need for a piece of that action.
2) We start with the individual trade. "What is hot", "What is Cramer buying?", get obsessed withcurrent gains that we already have, and become sold out to its future potential (big mistake), based on one favorable move. We don't consider the end-goal. For Beane it was to make the play-offs and a certain amount of wins. For traders the goal should be about where we want to be at the end of the year and trade according to that goal, and what it will take to get there. Our focus should not be on just the current stock(s) that we are trading and what we can get into next for that coveted and out of reach "BIG GAIN".
3) We place our identity within the stocks that we trade. Particularly those that we hold for an extended period of time. The best example of this is Apple (AAPL). People think this company can't do any wrong, that this is their meal ticket for all eternity. They are in love with the stock. And the stock has done well, but there will come a day, when even in AAPL, where those who have made their bed with this stock, will be left jilted at the alter.
And when the stock starts heading south (and this is with any stock), our identity is so ingrained with the position that we are holding, that we can't cut it lose. We hold on. We violate rules and throw out the window rationale. Billy Beane signed plenty of players that didn't pan out. But when it happened he cut or traded the player for someone else. When you're trading and the stock isn't performing – cut it lose and move on…and do it quickly.
4) Similar to #2, we find our security blanket in what other's think. Newsletters, media, peers, taxicab drivers, parents friends, and we also are concerned about public perception. Beane was considered one of the most inept managers back in 2002 for the actions that he was taking, before he went on to win a historic record of games in a row. We can't worry about what others think. If it works, its all that matters. And if it works, they will all be on your side in time anyways.
5) Some stocks are the scorn of Wall Street. Take Crocs Inc (CROX) for example. No one would even touch this stock a couple of years ago when it was trading below $1. People thought CROX would go out of business and never see the light of day again. Today's it is trading over $20/share. But how many of those same people that were saying that, were still holding on to AOL Incorporated (AOL), Microsoft (MSFT) and Walmart (WMT) that has absolutely gone nowhere in the last ten years. Trust your judgement, do what you know is correct in your trading strategy and don't deviate from it – no matter what anyone tells you. And ignore mainstream thinking and eliminate the noise.
Ninety-percent of traders lose money in the market and eventually they end up out of it permanently. Those on television, twitter, emails, newsletters, likewise fall in that category or will so eventually. So isn't it time that you trusted what you see on the charts and traded in a manner that would make Mr. Beane proud?
Tomorrow, I will begin going into concrete ways of putting a Billy Beane plan together for trading. SImilar to one that I have used over the years and will completely change your perspective on how you trade.