Wednesday, October 31, 2018

Moneyball: How the Red Sox Win Championships

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The Boston Red Sox won their fourth World Series title of the 21st century this week.

Having won their first Series in 86 years back in 2004, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it?

Quick background: in late 2002, team owner and hedge fund manager,
John W. Henry (with his partners) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $695 million.

Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship.


This brings us to one of my favorite scenes from the 2011 film, Moneyball, in which John W. Henry (played by Arliss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pitt) over to Boston with an excellent job offer

 
 

What I love about this scene is that it packs so much value and insight (that goes far beyond the sport of baseball) into a short, two minute dialogue.

As Henry tells Beane (Pitt) in this scene, "For $41 million, you built a playoff team... You won as many games as the Yankees won, but they spent $1.4 million per win and you paid $260,000."

"I know you're taking it in the teeth now, but the first guy through the wall always gets bloodied. Always."

"This is threatening not just their way of doing business, but threatening the game. But really it's threatening their livelihood, their jobs... Every time that happens, whether it's a government or a way of doing business, the people who are holding the reigns go batshit crazy."

"Anybody who is not tearing their team down right now and rebuilding it using your model is a dinosaur. They'll be sitting on their ass in October, watching the Boston Red Sox win the World Series."


John Henry's shrewd eye for value and statistical analysis, which played a major role in his trading career, was a decisive factor in turning the Boston Red Sox into one of baseball's most successful franchises.

As it happens, Billy Beane didn't end up taking the job with Red Sox, who instead hired Bill James acolyte, Theo Epstein as their GM. Soon after, Boston was able to break "The Curse of the Bambino" by winning their first World Series since 1918.

After winning two World Series championships with Boston, Epstein went on to help turn around my home team, joining the beleaguered Chicago Cubs in 2011. The Cubs won their first World Series in over 100 years in 2016.

The championships are wonderful, but for me the real point of this story is that these teams made a break with tradition, while disregarding their critics, in order to create a winning system and a whole new style of play.

As Billy Beane told ESPN, "It’s all about evaluating skills and putting a price tag on them."

"...Thirty years ago, stockbrokers used to buy stock strictly by feel.  Anyone in the game with a 401(k) has a choice.  They can choose a fund manager who manages their retirement by gut instinct, or one who chooses by research and analysis.  I know which I’d choose."


By viewing the field differently, and creating their own unique approach to the game of baseball (heavily influenced by Bill James' statistical insights), all of these teams - the A's, the Red Sox, the Cubs - were able to shake off years of underperformance and low expectations. They became winners, champions.

While it's true that, as John Henry's film counterpart pointed out, the pioneers often get bloodied, it's also true that the early adopters who follow closely on their heels often reap the richest rewards.  

Related posts and newsletters:

1. On Being Wrong... and Profiting Anway

2. Maximize Your Trading Gains, Not Wins: William Eckhardt Interview

3. Relentless (Interview): Michael Jordan's Trainer on Champion Performance and Mindset


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Monday, October 15, 2018

On Being Wrong... and Profiting Anyway (Quotes and Wisdom)

While revisiting the 1996 documentary Triumph of the Nerds this week, I came upon this fantastic segment on Apple co-founder, Steve Jobs.

Finding it eminently quotable (and useful), I just had to share some of Jobs' thoughts from this special clip.

"I don't really care about being right. I just care about success." - Steve Jobs



While Jobs was an entrepreneur in the emerging computer industry, and not an outright share investor or speculator, his quote about the relative unimportance of being right hit me right in the trader's gut.

Here is a game changing company founder saying, "you know what... I don't need to have the best forecasts or even the most original insights and innovations (hence the looting of Xerox's PARC). I don't need to always be right. I just want to ship the best products and win. That is what will ultimately make Apple the most successful company in our industry."

Now anyone who has studied modern business and the art of the "pivot" will understand that success may not come through your original idea or business plan. It may be the second or third business model you pivot to that leads you to find your true purpose and success.
Traders and investors in the capital markets must also realize that the need to be "right" while proving the markets wrong can lead to significant losses of capital or financial disaster. I'm sure we can all think of some high profile cases (ruined hedge funds and bailed out banks), or our own experiences in the market, where such a scenario has unfolded.

We can doggedly insist that we are "right" while we continue to lose money (as investors) or market share (as businesses), or we can learn from what real world conditions are telling us and align ourselves correctly to learn and profit from a new course of action.

So with that in mind, let's soak in some wisdom and see if we can change our attitudes and long held beliefs about being wrong. After all, no one is right all the time. How can we shift our focus from a need to be right to embracing ambiguity or being wrong, while learning from the situation?

Quotes: On Being Wrong and Learning or Profiting Anyway

"It is better to be roughly right than precisely wrong." - John Maynard Keynes

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” - John Kenneth Galbraith

"It's not about whether you're wrong or right in this business, it's about how much you make when you're right and how much you lose when you're wrong." - Stan Druckenmiller, citing lessons from George Soros

"Really good traders are capable of changing their minds in an instant. They can be dogmatic in their opinion and then immediately change it." - Steve Clark, via Hedge Fund Market Wizards. 
 
"The only thing to do when a person is wrong is to be right by ceasing to be wrong. Cut your losses quickly, without hesitation." - Jesse Livermore

"I became a winning trader when I was able to separate my ego needs from making money. When I was able to accept being wrong. Before, admitting I was wrong was more upsetting than losing money." - Marty Schwartz

"My stop loss method had two effects. It got me out of the wrong stock and into the right one." - Nicolas Darvas

"Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum drawdown." - Paul Tudor Jones

"I think there's a certain amount of humility with top traders. You have to make enough mistakes and learn to overcome them." - William O'Neil

"It is very important to know the edge of your own competency. You're a disaster if you don't know it." - Charlie Munger

"Being wrong isn't a bad thing like they teach you in school. It is an opportunity to learn something." - Richard Feynman
 
"The type of thinking that is necessary to succeed in the markets is entirely different from the type of thinking required to succeed in school... Mistakes are a good thing. They provide an opportunity for learning." - Ray Dalio, via Hedge Fund Market Wizards

"A prudent speculator never argues with the tape. Markets are never wrong, opinions often are." - Jesse Livermore

"Speculation requires and teaches you to accept reality as it is, rather than reality as you would like to have it." - Rakesh Jhunjhunwala

"The best thing you can do as a trader or investor is learn to recognize and cut your losses. Due to our schooling system, we equate being wrong with losing points and esteem... In the markets, losing or making money is not about being right or wrong. We need to manage risk and stick with our process." - Brendan Moynihan, What I Learned Losing a Million Dollars
 
"You can't use analysis to overcome fear of being wrong. More analysis will not produce better trading results." - Mark Douglas

"No problem can be solved from the same level of consciousness that created it." - Albert Einstein

"The best training ever for rigor and critical reasoning is trading. You can only survive long term by going against the wrong consensus by "experts"." - Nassim Taleb

"If you act in sync with the market, trading can make you rich. If you argue with the market it will surely make you poor." - Mark Minervini

"Minimizing mistakes is incompatible with maximizing learning." - Kent Beck

"If you want to improve, be content to be thought foolish and stupid with regard to external things." - Epictetus

Can you think of an instance where you realized you were wrong, or changed your mind and then benefited or learned from the situation? Tell us about it!

Keep these quotes handy, or print them out, and share them with your friends and family.

Maybe you will help someone change their outlook (or your own) and profit by doing so!

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Saturday, October 13, 2018

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Bernard Baruch Trader Speculator Writing B&W

Thursday, August 16, 2018

Mark Cuban on Elon Musk and Tesla: "You're Investing in an Entrepreneur"

Well the long knives were certainly out for Tesla (TSLA) and its CEO, Elon Musk this week.

Wall Street, legal firms, the SEC, and media talking heads were all roused to action (or comment) over Musk's recent proposal to take the company private at $420 per share.

After floating the idea (via Twitter) of a private buyout of Tesla on August 7, Musk wrote to Tesla employees and shareholders about his vision for running Tesla as a private firm in a blog post entitled, "Taking Tesla Private".

Among the advantages of operating Tesla as a private firm (as well as the disadvantages of being a publicly traded company), Musk lists the following: 

"...First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. 

Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. 

Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company."

In Elon's view, Tesla and its shareholders are currently weighed down by unfair attacks from short sellers and unscrupulous journalists. Going private would eliminate the distractions faced by fighting short sellers and may also reduce the high media glare.

Additionally, Wall Street's notorious short-termism and quarter-to-quarter view of a public company's prospects often clash with the longer-term vision of entrepreneurial company founders such as Musk.

Speaking to that point of entrepreneurial leadership, Mark Cuban recently shared his thoughts on Tesla and Elon Musk's vision in an interview with CNBC.


 
Leading off with his main point, Cuban reminds all of us that "when you invest in an entrepreneur, you get the entrepreneur!". An entrepreneurial founder is going to have a long-term vision for the company that a professional outside manager or CEO won't have.

When you think of the best, most disruptive companies of the last 25 years or more, you are invariably thinking of an Apple, a Netflix, or an Amazon. These are the company founders, people like Steve Jobs, Reed Hastings, and Jeff Bezos, who confounded the public and the Wall Street analysts early on with their unorthodox thinking and approach to running innovative, publicly-traded companies.

As Mark Cuban points out in his interview, "At one point everybody complained about Steve Jobs (who was fired in the '80s)... everybody complained about Jeff Bezos [no profits, no quarterly guidance]. Reed Hastings, same thing...

...Everybody complained about 'the fundamentals' of all these companies... these guys [founders], they don't cash out like me. They stay there because they're committed and dedicated. You've got to take the uniqueness of each person as part of what you're invested in."
 
On the subject of short sellers, Cuban added, "I would tell Elon that the shorts are your friend. The beauty of shorts is, if you have a great quarter and you do your job, they have to buy back their position [at higher prices]. Rather than getting upset about shorts, know that the more shorts you have, the more buyers you have in waiting."

Note: this point about Tesla shorts adding fuel to the fire was made here last year. 

Great entrepreneurs want to stick around for the long haul and tackle the issues their companies face. As Mark Cuban reminds us, founders like Musk, who "sleeps in the factory", are uniquely driven and have their own unique way of communicating with the public. That's part of what makes these entrepreneurial tech companies so exciting, so competitive, and ultimately, so successful. 

Disclosure: I currently own a very small amount of Tesla (TSLA) shares via the ARKW etf.

Related posts:

Tesla is Exciting... But Its Stock is Stagnant

Elon Musk: The Future We're Building at TED

Reed Hastings, Netflix CEO Interview w/ Charlie Rose

Tuesday, June 19, 2018

Interview with Relentless author Tim Grover: Michael Jordan's Personal Trainer on Mindset and Performing Under Pressure

"The one thing that Michael [Jordan] has, that really stands out, is that he doesn't compete with anyone else. He competes with himself." - Tim Grover.


Michael Jordan Air Jordan slam dunk contest free throw line
Air Jordan free throw line slam dunk

How appropriate that this interview with Michael Jordan's personal trainer and Relentless author, Tim Grover should appear in issue #23 of the Finance Trends Newsletter.

Although I had planned to highlight Tim Grover's excellent discussion on mindset and champion-level performance in our very next newsletter, I did not anticipate this fortuitous numbering sequence. Actually, I hadn't noticed it until I typed up today's email subject heading while counting back through our prior issues.

I'm excited by the coincidence, but it's only because I'm even more excited to share Tim's message with you. You might say that his interview struck a chord with me.

But first, let me briefly tell you why I find this interview to be so crucial. Our mindset and our beliefs around what is possible dictate what we can achieve in life. If the winning mindset is not there, the desired results will not materialize for us.

In trading, business, and sports, we are entering a global playing field of high-level competition. We're not only competing with the people (or organizations) in our immediate orbit, we're increasingly competing against those half a world away.

We're also competing with ourselves. As many great traders and investors have remarked, the greatest obstacle to success is not other traders but ourselves - our own psychology.


This is also the theme of Tim Grover's quote (see above) about Michael Jordan, the consummate competitor.

Tim Grover trains with Michael Jordan, with Kobe (right) via Sports Illustrated.

Now, if I can spend an hour or two with the guy who helped turn Michael Jordan "NBA Phenom" into Michael Jordan "6x NBA Champion" (he has helped Kobe and other NBA stars get there too)... well, you can bet I'm going to listen well and then do my best to apply what I've learned.

 
Interview with Tim Grover: Relentless author, trainer to Michael Jordan and Kobe Bryant.

Some highlights from the interview...

Tim grew up in Chicago and played college ball at UIC, but realized that he would not realistically make it to the pro level. That realization was brought into sharp focus as a college sophomore when he squared up on the court against a high school junior named Tim Hardaway.

"I still wanted to be involved in sports, ideally basketball. Let me figure out a way to help other athletes reach the top of their game. I studied kinesthiology... and worked with anyone I could to learn to apply it."

Grover asks, "You know how I choose a client or [collaborator] someone to listen to? They have to be as fucked up and as crazy as I am!"

He is not one for the philosophy of balancing yourself with a partner of differing personality. He wants someone as intense and driven as he is. In his view, you don't want a partner who is pulling you away from the person you really are.

Tim shares a great story (which I won't replay here) of how he finally connected with Michael Jordan and why "the best of the best" was motivated to work with him.

"A lot of individuals, especially in this generation, are jumping around too much these days. They're using this trainer one week and another next week... or this mentor one week and this person on YouTube over here... they're getting all this conflicting information."

Michael and Kobe mastered one aspect of the game. Then they moved on to a new aspect of the game. Master one thing at a time.

Grover divides performers into 3 levels of effectiveness: Coolers, Closers, and Cleaners. The "Cleaners" are top level, clutch performers who always reach down inside themselves to nail the winning shot. They are instinctual in their approach, deeply focused on the task at hand, and they set the standard for excellence.

"Your obligation to yourself to be the best has to be greater than any outside pressure on you." Tim cites Tom Brady and MJ as athletes who exemplify this trait.

"We're not born with greatness. That's bullshit! You earn greatness. You have to fight like hell to get to paradise. People don't know how to fight anymore. People quit [too often these days]... It's the icons who fight like hell to succeed."

Top level individuals stand alone. The inner circle of the "greatest" individuals is so small. Distance becomes their best friend. Most people want to join the group, the in crowd, the fraternity. "Who do you idolize the most? The ones that stand alone."

As Tim points out, the conventional wisdom of "surround yourself with positive people" is bound to backfire if all those people just smile and tell you what you want to hear. You need to surround yourself with people who will straight up tell you the truth (on this point I agree 100%).

We're all going to fail at something. It's only failure if you don't bounce back.

On dealing with pressure: "Everybody can handle pressure. Most people decide not to. We run from it. Stress is just pressure you won't deal with." 


The Importance of Mindset: "Before you have an exceptional skill set, you need to have a great mindset. Michael and Kobe weren't the greatest athletes I have ever worked with. They were great athletes, but their mindset is what separates those individuals.Tom Brady was drafted 199th (6th round)... he wasn't the best athlete. But from a mindset standpoint, he is a killer!"

Related posts:

More from Tim Grover, author of Relentless: From Good to Great to Unstoppable

Interview: Tim Grover, trainer to NBA stars, talks Jordan, Kobe, Lebron and Durant 

Developing Your Mental Trading Edge: Webinar with Dr. Andrew Menaker

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