Moneyball is a book written by Michael Lewis that followed the day to day operations of the 2002 Oakland Athletics baseball team and its general manager Billy Beane. I always knew there were similarities between Moneyball and passive investing. For example, both are fundamentally grounded in an evidenced based approach, unconventional and often shunned by traditionalists. But it wasn’t until a few weeks ago, when I had an opportunity to hear Billy Beane speak at a conference, that I realized the similarities were much deeper.
Think of Wall Street and major brokerage firms as the New York Yankees or Boston Red Sox of the investment world. If you try to beat them at their own game you are most likely going to lose. Large market baseball teams with higher revenues and payrolls have the ability to absorb losses more easily than small or mid market teams with lower revenues and payrolls. Likewise, Wall Street and major brokerage firms have significantly more resources and are more solvent than the average individual or institutional investor, which allows them to easily absorb losses made from making the wrong decisions at the wrong time. Throw in the costs associated with playing the transactional Wall Street game and an investor’s disadvantage becomes even greater.
Just as smaller market baseball teams like the Athletics and Tampa Bay Rays have had to think differently to remain competitive in an unfair game, investors have started to take notice of a more prudent approach to investing. An investment model rooted in academic evidence and transparency – an alternative approach that Wall Street, major brokerage houses and most financial media would prefer investors didn’t know about.