Notes from the Diamond #5 Wannabes Beware December 15, 2018 David A. Salem Twitter: @dsaleminvestor Email: [email protected] 2 0 1 8 H O L I D A Y E D I T I O N ReaDing Time: 15 minutes * * More if you Dive into the cLosing exhibit. Caffeine recommenDeD for it. If the LorD were a Pitcher, he wouLD Pitch Plagiarism is the carDinaL virtue of like PeDro [Martinez]. investing. — Pro baseballer David Segui — Pro investor Jeremy Grantham (?) Trivia Question #5 of 108: Which of the following A - A player’s mother hit and injured by a fouled-off phenomena has occurred just once since the pitch thrown by her son on Mother’s Day. inception of Major League Baseball (MLB) in 1876? B - A spectator hit and injured by two foul balls hit by When choosing among the options listed below, the same batter in a single plate appearance. note that in 143 years of MLB competition, 217,082 C - A player killed by a pitch. games have been played, with well over 30 million pitches thrown during almost 15 million at-bats. D - All of the above. Among the many things investing and pro baseball persons on whom the trivia question above focuses. have in common, perhaps foremost among them is a Sadly, the correct answer to that question is D — All rich tradition of purposeful mimicry: a conscious of the Above — Hall of Fame pitcher Bob Feller’s copycatting of methods that have worked well for mother having been smacked by a fouled-off pitch the persons who devised them originally and that thrown by her son on Mother’s Day 1939; Richie can presumably be put to good use by others, Ashburn of the Phialdelphia Phillies having hit competitors not excepted. Of course, some methods spectator Alice Roth with two bone-breaking foul are harder to mimic than others, including the balls in a single at-bat in 1957; and Ray Chapman idiosyncratic approach to pitch selection and having been killed by a pitch in 1920 under execution employed by Pedro MartineZ during his circumstances worthy of contemplation by risk- Hall of Fame career, or the equally inimitable takers of all kinds, including especially those of us approach to capital deployment employed by my — perhaps most of us? — inclined to mimic others’ former partner and valued mentor Jeremy winning ways rather than attempting to fashion our Grantham. Jeremy has served up so many witty and own. wise tidbits about investing since my path first crossed his 35 years ago that I’ll credit him as the AmaZingly, on the very day that Chapman got original utterer of the above wisecrack about our beaned, a how-to manual for young baseballers was shared profession’s cardinal virtue — even if Jeremy published featuring images of Chapman and other borrowed it from someone else or, contrary to my MLB stars doing things that gave each of them a recollection, never uttered it as quoted here. presumed edge. Chapman’s highlighted forte was a batting stance that the manual’s author (baseball If indeed Jeremy borrowed the wisecrack in question writer par excellence John Sheridan) deemed “the from another sage, that act might be the only perfect model for all baseball players in his position instance of his having engaged in plagiarism, trivial at the bat.” Alas, such athleticism was of no help to or otherwise: like select pros in both baseball and Chapman during his ill-fated final at-bat, confronted investing who are properly deemed original thinkers, as he was by a pitcher — Carl Mays — whose Jeremy constitutes an exception proving the rule “submarine” delivery made it hard for even skilled that copycatting of demonstrably successful batsmen like Chapman to see let alone hit balls Mays methods is a logicaL means of gaining an edge in flung toward them. Chapman’s difficulties that fatal either of the two arenas on which these notes focus day in 1920 were compounded by a heavily soiled — baseball or investing. ball — an acute hazard for batters obsoleted by rules changes catalyZed by Chapman’s death, to the The problem with copycatting, of course, is that it’s unending gratitude of ball purveyors enriched by not a wholly reliable means of getting ahead in MLB’s post-1920 policy of jettisoning balls showing either baseball or investing — endeavors in which the slightest signs of wear and tear. Unable to see changing circumstances beyond a player’s control or divination can affect outcomes to a substantial degree. ET faithful know well whereof I speak respecting uncontrollable and unforecastable forces affecting asset prices, Ben Hunt having discussed such phenomena eloquently and arrestingly in his seminal essay The Three-Body Problem and follow- on series Things Fall Apart. Focusing as this note does on the varied fortunes of wannabes in baseball and investing, it necessarily discusses how chance events have helped shape such fortunes, sometimes for the better, as with arguably the most skilled capital allocator in recent decades (Yale CIO David Swensen), and sometimes for the worse, as with the ©2018 Epsilon Theory All rights reserved. 2 the pitch that ultimately killed him, the normally go beyond those susceptible of codification and nimble Chapman remained immobile during the copycatting — copycatting of the sort undertaken by roughly half-second it took for the ball to travel from wannabes convinced that a given “model” will surely Mays’ hand to his unprotected skull. (Batting yield results for themselves as stellar as those helmets hadn’t yet been invented and didn’t become achieved by the model’s initial user(s). mandatory in MLB until 1970). The point just made — the chief point of this note for What useful lessons might wannabes in baseball (or sorry souls who care little about baseball but lots investing) like me (or you) draw from Chapman’s about investing — was not coincidentally also the untimely beaning? Two such lessons come to mind chief point of a review of Swensen’s pathbreaking — both easily synopsiZed and both serving as useful book on institutional investing (Pioneering PortFolio segues to the discussion of conscious copycatting’s Management) that appeared in Barron’s at the time perils that constitutes the remainder of this note. of its initial publication in 2000: The first lesson gleanable from Chapman’s final at- Rooted as its success is in the idiosyncratic bat is perhaps obvious: beware changed boundary personaLity of the man who fashioned it, conDitions that renDer Proven methoDs useLess at the ‘unconventional’ money management best anD hazardous at worst (e.g., a darkened ball approach that Swensen extols is anything hurled in a highly unconventional way). but a guaranteed path to profit for institutions lacking such talent. Indeed, The second lesson is more subtle but even more numerous fiduciaries are likely to read this germane to the sorry and indeed ongoing saga of the book and do precisely the opposite of what siZable slice of investors who’ve tried and failed to Swensen advocates: commit excessive sums “be like Yale”: beware the use of demonstrably to market niches whose strong past successfuL methoDs bereft of their centraL virtues. performance has removed the discomfort associated with truly superior investment [Readers puZZled by my use of slice in the prior opportunities. [Ed.: highlight added] paragraph are hereby reminded that it’s the collective noun for a group of lemmings.] I’m certain the seer bloke who wrote the review just quoted won’t object to my highlighting of Swensen’s Until Mays’ pitch hit him, Chapman’s final at-bat idiosyncracies (more on which later) — because that 1 didn’t differ in kind from his 3,794 prior trips to the reviewer was me. How well did my review of plate, 1,053 of which resulted in hits and all of which Swensen’s masterwork foretell its eventual impact purportedly entailed Chapman’s assumption of the on institutional investing? Fairly well, I’d argue, “model” stance referenced earlier. In hindsight, that given the massive movement of institutional capital stance was a necessary but insufficient condition for since the book’s publication into two forms of Chapman’s success and ultimately survival as a investing that Swensen has long favored: absoLute batsman. return orienteD heDge funDs (AROHF) and private equity (PE). (N.B.: As did Swensen from the start of This isn’t to say that a baseball wannabe like me or his tenure as Yale’s CIO until recently, I’m using PE in indeed even the most nimble batsman might have this note to encompass investments in non-listed dodged Mays’ bullets more successfully than did companies of all kinds, regardless of stage.) For good Chapman on August 16, 1920. Rather, it’s to say that and important reasons, Yale doesn’t disclose how extraordinary success in most fields of endeavor individual managers it employs have performed. But typically presupposes proficiencies that include but a careful review of the superb reports that 1 The full review appeared in Barron’s on June 5, 2000 and is available at www.barrons.com or by contacting its author here. ©2018 Epsilon Theory All rights reserved. 3 Swensen’s office has published since 2000 confirms referenced also talks my own walk, if you will, that a key tenet of the investment philosophy David flagging salient features of my preferred approach to devised for Yale during his opening years as its CIO deployment of long-term capital (A Third Way) as and has implemented faithfully throughout his this not unhappy century continues to unfold. tenure in that post has proven sound: favor forms of investing entailing superabundant dispersion of Wait: given the growing centrifugation of markets returns among investment pros engaged in such and politics that Ben chronicles so convincingly in activity.