Consider the excerpt:
Thomas Boswell, “Evaluation By Numbers Is Beginning To Add Up” The Washington Post: May 29, 2003
For nearly 25 years, there’s been a huge food fight in baseball. The argument was basic: How do you evaluate a player? On one side were general managers, scouts and managers. For the most part, they evaluated players the old-fashioned way — with their eyes, stopwatches and radar guns and by looking at statistics which were popularized in the 19th century. Their mind-set was always, “How fast does he run? How hard does he throw? What’s his batting average? Does he look like a major leaguer should look?” On the other side — led by statistical gurus such as Bill James and Pete Palmer, and assisted by countless lesser “seamheads” (including, at times, me) — were the geeks, the outsiders, mere fans, who thought they knew better. Many of us never thought this day would come. Now, with the best-selling success of Moneyball by Michael Lewis, sophisticated statistical analysis has finally become a publicly acknowledged part of baseball’s mainstream. As Lewis has chronicled, the methods used by the Oakland Athletics in recent years have succeeded so suddenly and so well that, after reading “Moneyball,” many an owner — especially poorer ones — will have to ask, “Why aren’t we doing it this way?” A few years ago, Oakland General Manager Billy Beane bought the whole New School stat-analysis worldview, inspired by James’s popular “Baseball Abstract” but expanded by many people over many years. Beane’s 100-win low-budget A’s have been constructed almost entirely on academic ideas that are heresy to traditionalists. In Beane’s world, the stats always rule…Just as important, Beane’s disciples or imitators are now in complete control of the Boston Red Sox (for whom James is a consultant and owned by John W. Henry) and the Toronto Blue Jays — the Red Sox lead the American League East and the Blue Jays are three games back. The virus has spread. The genie is out of the lamp. There’s no turning back now.
TurtleTrader comment: John W. Henry, now owner of the Boston Red Sox, is of course part of Lewis’ Moneyball. Trend followers will enjoy this book, as the parallels to trading are uncanny. Read it!
Why the Parallels Are Uncanny
The food fight Boswell describes in baseball is the same food fight that has been ongoing in financial markets for decades. On one side: the traditionalists who evaluate stocks with their eyes, their gut, their rolodex, and the statistics that were popularized in an earlier era. They ask: What does the CEO look like? Does the business have a competitive moat? What is the P/E ratio? Does the company look like a great investment should look? On the other side: the systematic practitioners who thought they knew better, who built models from data, who were dismissed as geeks and outsiders by the established institutions. The systematic traders, like Beane’s statistically-driven Oakland A’s, produced results that embarrassed the consensus while spending far less on the inputs.
The John W. Henry connection is the most direct. Henry is both a pioneer of systematic trend following and the owner of the Boston Red Sox. He applied the same statistical rigor to assembling a baseball team that he applied to trading global futures markets. The methodology transferred because both problems are fundamentally the same: how do you allocate resources optimally across a probabilistic system when conventional wisdom is systematically wrong about what drives outcomes? In baseball, conventional wisdom overvalued tools and undervalued on-base percentage. In financial markets, conventional wisdom overvalues fundamental analysis and undervalues systematic price-based approaches. Beane exploited the baseball mispricing. Henry exploited the financial markets mispricing. Same framework. Different arena.
Boswell’s observation that “the genie is out of the lamp, there’s no turning back now” applied to sabermetrics in 2003. The equivalent observation for systematic trading has been true since the 1970s when the first documented trend following operations began producing audited returns that the consensus said were impossible. The virus spread more slowly in finance than in baseball, but the evidence has been available for decades. The question for any investor who reads Moneyball is precisely what Boswell asked baseball owners: “Why aren’t we doing it this way?”
Frequently Asked Questions
What are the parallels between Moneyball and trend following?
Both involve applying systematic, data-driven analysis to a domain where conventional wisdom relies on intuition, appearance, and traditional metrics that have not been rigorously tested. In baseball, the A’s replaced scout judgment with statistical analysis of what actually predicts winning. In trading, systematic trend followers replaced analyst judgment and fundamental research with price-reactive rules based on what actually produces returns. Both approaches were dismissed by the establishment and both produced documented results that eventually forced the establishment to acknowledge the approach.
What is John W. Henry’s connection to Moneyball?
John W. Henry, one of the greatest systematic trend following traders of all time, purchased the Boston Red Sox. The Red Sox hired Bill James, the statistical pioneer whose work inspired Beane’s approach, as a consultant. Henry’s ownership brought the same systematic, data-driven philosophy to baseball that he had applied to trading global futures markets for decades. The same mindset that produced massive trading profits was applied to assembling a championship baseball team.
Why do trend followers find Moneyball compelling?
Because the story is structurally identical to the story of systematic trading: outsiders with better analytical frameworks outperform established insiders who rely on conventional methods, are initially dismissed, and are eventually proven right by the evidence. The baseball establishment’s resistance to statistical analysis mirrors the financial establishment’s resistance to systematic trading. Both forms of resistance were eventually overcome by documented results that could not be explained away.
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