How About Never Notes from the Diamond #9 Coaching Tips for the Long Now Exploring Parallels Between Baseball and Investing David A

How About Never Notes from the Diamond #9 Coaching Tips for The Long Now Exploring parallels between baseball and investing David A. Salem Log of all notes available here Email: [email protected] All notes optimized for viewing in PDF form Twitter: @dsaleminvestor PDFs available to paid subscribers only; subscribe here

J A N U A R Y 2 0 20 R E A D T I M E 1 0 M I N U T E S

There have been so many fundamental changes to the way that baseball, football and basketball games are played that there is no longer any doubt that the nerds have won — and sports will never be the same.

Ben Cohen, Jerod Diamond & Andrew Beaton in “The Decade When Numbers Broke Sports”, Wall Street Journal, December 19, 2019

Trivia Question. How many days elapsed them Ben serves up in The Long Now. If you between the end of Ben Cherington’s tenure as haven’t studied that multi-part gem yet, I urge general manager of the Boston Red Sox in 2015 you to do so before proceeding. and principal owner John Henry’s utterance of this seemingly unqualified endorsement at a [Welcome back.] press conference in Fenway Park: “[Ben] is going to be the general manager of this team for a very Admit it: if asked when the 2010s began if capital long time to come.” Answer below. markets could morph by decade's end into "political utilities" to the degree Ben dutifully Never Works For Me. Your in-box resemble mine describes in The Long Now, you — like me just now? Wouldn’t doubt it. The Decade in — would’ve said, "Never.” Review. Yay! The Decade Ahead. Yay! Actually, nay, with most of the many fin-de-decade pieces Admit too that you, like me, hope Ben's hitting my in-box of late getting trashed in short decidedly dreary Now proves less long-lived order. Which don’t? Those containing useful than he conjectures. takes on two distinct but cognate phenomena: (1) past events to which investors as a group Could it? Sure. After all, if the 2010s ("Teens") assigned slim but non-zero odds before they proved anything respecting capital markets — or unfolded; and (2) potential events to which the politics— they proved anew the cardinal wisdom same crowd assigns similarly slim odds. of never saying never.

This first NftD of the decade just commenced Negative interest rates on trillions of dollars of seeks to shed useful light on both such debt? Never. Annualized stock returns on the phenomena, supplementing as distinct from S&P 500 vastly higher than that of major non-US disputing weightier and worthier thoughts on stock indices to say nothing of annualized growth

©2020 Epsilon Theory All rights reserved. 1 in US or global GDP? Never. A reality TV king with this series closed: "Up next: the importance of a well-earned reputation as a wholly unreliable character and temperament in ‘weak link’ partner (business or domestic) getting crowned endeavors like pro baseball and investing.” With elected president of the US? Never. Yet all these both apologies for their Trumpian rank developments plus others that seemed wildly unconditionality and a hat tip to Rusty for improbable ex ante actually transpired. extolling neverism in By Our Own Petard, here are three coaching tips for getting by in the So too did unanticipated developments in a field decade now unfolding:1 of human endeavor on which these Notes from the Diamond focus more than politics if not also Axiom #1 — Outsiders to an organization markets, namely pro baseball. can never know in real time what goes on inside it. As WeWorks Major League Baseball's (MLB's) Readers don’t need me to catalog fully the now-disgraced 2017 champs taught the world sundry shockers that markets produced during anew, the more central a suspect person or the decade just ended (though I can't resist practice is to an organization's apparent success, flagging a few below). Nor do readers who follow the more tight-lipped insiders will be about him baseball closely need me to catalog fully or it. its sundry shockers in the Teens. Indeed, with baseball much in the news just Now, for all the ["Him" may be inapt here — see for example wrong reasons, the last thing any reader wants recent revelations about the former female let alone needs is my extended discourse on CEO of luggage maker Away— but the incidence baseball's biggest surprises over the last ten of bad behavior by male execs is arguably years (though I can’t resist flagging a few below). disproportionately large relative to males' disproportionately (sic) large presence in C- And while anyone reading this note surely hopes suites.] to find in it actionably reliable forecasts of market-moving events certain to unfold over Consider how many person-hours journalists the next ten years, no one who’s internalized and analysts not employed by the Houston Ben’s forecast-phobic views in The Three Body Astros spent studying that team's every move as Problem deems such soothsaying feasible, least its march toward a world championship in 2017 of all me. progressed. Consider (depressingly) that, despite such intense scrutiny, outsiders to the Coaching Tips. Accordingly, the rest of this note organization didn't obtain credible evidence of comprises not falsely confident forecasts of what the team’s corrupt practices until an ex- the new decade holds for markets or baseball insider (current Oakland pitcher Mike but rather non-falsifiable axioms that might Fiers) spilled the beans to two respected help folks heeding them survive if not thrive as journalists, fully two years after Houston the Twenties unfold, regardless of any beanballs snatched its ill-gotten crown. the decade hurls at all of us. Consider too how many person-years allocators As will be seen, to clear the high (or is it low?) bar and consultants thereto spent diligencing Ken just set, the maxims proffered below focus on Fisher and his eponymous firm from its standing unchanging aspects of the human condition, and start in 1979 launch to its $100 billion zenith (in more specifically on the focal point for this note AUM terms) in 2019. As with many former flagged in the teaser with which the prior note in admirers of the Astros' winning ways, many

1 Kudos to Rusty for having the courage to assert privately: “We will never — can never — be aligned publicly what most allocators are afraid to admit even with our agents.” [Emphasis added]

©2020 Epsilon Theory All rights reserved. 2 former Fisher clients claim to be shocked — Jack Welch's "profit"-laden years at GE's helm, shocked — to find that an apple they otherwise Masayoshi Son's "gain"-laden tenure at Softbank eyed favorably was rotten at its core. prior to WeWork's recent implosion — as the truth never fails to emerge, albeit sometimes Assuming as I do that most such claims of with a prolonged and problematic lag. But it's no ignorance, unlike Captain Renault’s in less true of legitimate triumphs, including a Casablanca, are legit, what might folks keen to baseball feat that garnered far fewer plaudits avoid such shocks do before entrusting their when accomplished than it has in the 86 years hearts or capital to organizations of which they since then. themselves are not part? I'm unsure I have a universally applicable answer to this question, except to invoke my favorite maxim about investing: "Diversification," the late Peter Bernstein counseled, "is the only rational deployment of our ignorance."

In keeping with such counsel, and as hinted in the two prior and conspicuously Trout-centric notes in this series, I'm now dividing my loyalties between the longtime but decreasingly worthy object of my MLB affections (the Bosox) and a team whose presence in the same division as the Astros (AL West) has subjected it in recent years to as much Astros-inflicted pain as any MLB franchise excepting perhaps the one with which Former General Electric Chairman and CEO it shares its domicile. Jack Welch, photographed during his 20-year tenure (1981 – 2001) heading GE. I'm speaking of the Los Angeles Angels, of course, the AL West club that just hired as on- In the 1934 MLB All-Star Game, pitcher Carl field manager the sage who led the 2016 Cubs to Hubbell struck out an impressive but by no their first world championship in 108 years: Joe means unprecedented five batters in succession. Maddon. Maddon has never been employed by In due course, all five — Babe Ruth, Lou Gehrig, the LA-based team whom the villainous Astros Jimmie Foxx, Al Simmons and Joe Cronin — were beat in the 2017 World Series (WS) — the enshrined in the Hall of Fame, causing later Dodgers — but he started his pro baseball career generations of baseball fans to marvel with an LA-based franchise (the Angels) 45 years ceaselessly at Hubbell's evident mastery of his ago and will hopefully end it on a high note with craft. the same organization. Time will tell whether he does so — and will tell too whether Maddon's Hubbell was indeed a fine pitcher: good enough seemingly supreme skill in skippering the Cubs to himself get elected to the Hall in ’47, 13 years was real or merely apparent. I'm convinced it after his memorable feat in '34, which itself was real, but ... unfolded two years before the Hall was created and five years before Ruth became the first of Axiom #2 — Human labors can never be gauged the aforementioned batters to be enshrined in it. fully and dispositively in real time. This is certainly and conspicuously true of sham From our perch in the 21st century, Hubbell’s achievements — the Astros' WS win in '17, Lance performance in the ’34 All-Star tilt seems not Armstrong's seven "wins" in the Tour de France, merely laudable but unworldly. It didn't in the

©2020 Epsilon Theory All rights reserved. 3 moment, long before the deceptively difficult pitches without such choices getting detected by conditions governing his five straight K's became opposing players or indeed any third party fully apparent to baseball cognoscenti. except perhaps the Kremlin. Hopefully, Putin and his goons are too busy attacking Western Similarly, the seemingly poor performance of civilization’s other vital institutions to disrupt later-day pitchers who got blasted by the 2017 America’s former? national pastime. Astros was not as bad as it seemed in real time. Sadly, these poor souls included not just Axiom #3 — Chains are never stronger than established stars like future Hall of Famer their weakest links. In some folks' eyes, baseball Clayton Kershaw but pitchers of far less renown is every bit the "strong link" sport that the poster (and wealth) who could ill afford to get child for same, basketball, would appear to shellacked, psychologically and in due course be. After all, put an overpowering pitcher like financially via artificially repressed pay Bob Gibson on the mound, and all a team must trajectories. typically do to win is score one or two runs. Doing so seems a snap with at least 27 outs to “spend” in the pursuit.

Of course, even ultra-tough pitchers like a Gibson or 2019 MLB innings leader (and Astro) Justin Verlander can pitch only so many innings in a season or indeed a career, leaving the teams that employ them vulnerable to opponents’ exploitation of "weaker" teammates' relatively inferior play. (FWIW, Verlander pitched 223 innings in 2019, less than 15% of the season’s

total of 1,462 for all Astros pitchers.) Los Angeles Dodgers watching the Houston Astros’ on-field celebration of their 2017 Basketball, conversely, is clearly a "strong link" World Series win. sport — except when it isn't. To be sure, hoops teams with GOATs like Michael Jordan or Lebron Sadly too, it's going to take a few years at best James tend to win much higher fractions of their for younger position players on the 2017 Astros games than even the winningest baseball teams, to prove they can rack up hits without the aid of it being far easier for a single star to shine on a impermissibly stolen signs — if indeed MLB takes court populated by nine other players engaged the necessary steps to "prove the negative" on in fluid action, including four allies, than it is for such players' behalves, i.e., to convince outside a comparably gifted position player to dominate observers that sign stealing done in a manner under the regimented conditions governing the violative of MLB rules no longer happens actions of twice as many official participants in a because it cannot happen. baseball game at any given point in time (i.e., two teams times nine players each). Arguably, the only way MLB can furnish such proof is to do what many money managers have That said, all forms of group endeavor, no done since algo-driven trading became matter how they’re constituted in theory, can dominant in markets earlier this century: combat morph into "weak link" undertakings in tech-based threats by throwing ever-increasing practice, especially under the conditions that tech-based assets into the fray. For MLB, this matter most: when existential threats strain all means among other measures the green-lighting links, weak or strong, to the max. of gizmos enabling pitchers and catchers to pick

Exhibit A for this assertion comes not from between his team and its fan base. That said, baseball but from basketball, as manifest in the clear-eyed observers can’t help wondering if the Golden State Warriors’ run-up to the first of their fractures aren’t attributable in large part to three NBA championships over the decade just Crane’s own failings, late often being as harmful ended (more than any other franchise). Facing as never respecting Luhnow’s firing fidelity to an opponent whose starting five included a mission-critical values. legendarily strong defender with weak offensive skills, the Warriors left that player (Tony Allen of Don’t believe it? Cast clear eyes on Crane’s the Memphis Grizzlies) unguarded, thus counterparts with the Mets, who discovered too enabling them to “double team” a rotating array late that the manager they hired in November of Allen’s more offensively gifted teammates. In (Carlos Beltran) had flaunted MLB rules as an short, the Warriors converted a strong link Astro. Beltran’s tenure as Mets manager lasted endeavor into a weak link one to their 77 days, ending ignominuosly with a joint advantage, gauging correctly that the Grizzlies statement from the team’s co-owner and COO did indeed have an exploitable weak link. Jeff Wilpon and its GM Brodie Van Wagenen.

Of course, anyone who’s ever sat on an You’d think that of all team owners in any sport, investment committee or governing board of the family who got well and truly suckered by any kind can attest to such groups’ acute Bernie Madoff would be least likely post-Madoff vulnerability to weak link degradations, as to commit grievous errors diligencing a key discussed in unloving detail by yours truly in a potential hire. How can Mets fans reasonably talk on group dynamics downloadable here. expect the team to perform strongly on the field when the family controlling it is so weak in Similarly, anyone who’s been following the discharging its cardinal duty of picking talent? Astros over the last few years can attest to that franchise’s regrettably but perhaps inevitably To be sure, the Wilpons’ tenure as the Mets' checkered performance under the leadership of chief puppeteers may in the fullness of time be its recently dismissed general manager, Jeff judged less harshly by outsiders than it is Luhnow. For now, and likely forever, the record presently, especially if things go from bad to books show Houston winning more regular worse for the Bosox, a franchise that itself just season games than any other MLB team over the completed a memorably brief round-trip trade three years ending in 2019 (311 vs. 302 for the runner-up Yanks), an achievement befitting a team assembled and overseen by as amoral analytical a GM as MLB has ever known. Precisely what Luhnow knew about his team’s illict sign stealing and when remains unclear, at least to me. What’s perfectly clear, however, is how ineptly Luhnow managed the fallout from a key deputy’s disreputable dust-up with two journalists whose EQs if not also IQs are higher than his own, his then-boss’s (Luhnow), and his then-boss's boss, Astros owner Jim Crane.

Clear Eyes, Full Hearts. Full-hearted observers Mets co-owner Fred Wilpon with Bernie can’t help feeling sorry for Crane, who’s seems Madoff, pre-2008, of course. to be doing his all to repair fractured links

(to use trader-speak) with Alex Cora, a key championship as well as its somewhat uneven facilitator of dirty deeds that helped the ‘17 start in '15 (23 wins out of 52 games played Astros and (gulp) maybe also the ‘18 Bosox go all through June 14) was "going to be the general the way. 2 manager of this team for a very long time." Sixty two days later, Cherington's tenure as Bosox GM How one scores this now-completed round- ended, technically by resignation but actually by tripper depends importantly on how one applies dint of the team's hiring of a new exec to oversee all of the axioms propounded here, and more all baseball ops including roster moves or non- specifically on the lasting value one assigns to moves that’d previously been entrusted to feats whose titanic initial dimensions shrink over Cherington. time as the means used to achieve them become increasingly suspect when viewed in hindsight. That exec (Dave Dombrowski) ultimately hired Alex Cora; saw the talent-laden and Cora- On this point, Crane has stated if not fairly managed Bosox win the Series in '18; and was boasted that nothing that's come to light about summarily dismissed by Henry on September 9, the Astros' championship season in '17 can 317 days after the Bosox clinched the 2018 negate the joy it produced for Houstonians, in Series and roughly six weeks before the first the moment and presumably forever. Who am I credible accounts of Cora's conscious rule- to say he's wrong? breaking in Houston became public.

What I can say or rather ask of "my" team's Did Henry and his brain trust know big shoes principal owner, legendarily successful were about to drop on Cora when they fired the commodities trader John Henry, is the following guy who’d hired him to manage the Sox? I doubt question: how did an ownership group whose it. Has Red Sox Nation experienced joys and smarts brought the Bosox’s 86-year pride since Henry took control of the team in championship drought to a joyful end (in 2002 sufficient to offset the agonies and '04) and assembled two more World Series- embarrassments his tenure atop the franchise winning squads over the next nine years (’07 and has produced? Until news broke of Cora’s ’13) do such a poor job vetting Cora? Might this checkered past several weeks ago, this lifelong group have discovered disqualifying skeletons in Bosox fan would’ve answered yes without Cora’s closet prior to his hiring in late 2017 if hesitation. Upon reflection, I’m not so sure. Henry had made his fortune not as a "quant" but rather as an investment pro relying heavily on Never Is Good. Looking forward rather than subjective assessments of corporate backward, my best advice to those seeking to get managements and cultures? through the Twenties without getting slammed by their own or others’ infidelity to the axioms The question just posed may seem off-point to propounded above is to pay particular heed to some readers, albeit perhaps not those who've the third. read Alex Speier's book on the Bosox's 2018 championship and its antecedents. On June 14, Ask anyone who went down with the Lehman 2015, Henry told Red Sox Nation that the GM ship, metaphorically speaking, whether Lehman who’d presided over the team's 2013 employed any world class execs until the very

2 In December 2019, the Wilpons agreed to an (hedge fund titan Steve Cohen) has his fair share of installment sale of their majority stake in the Mets both admirers and detractors, with yours truly not that will reduce them to minority investors after knowing enough about the man to have an informed 2024. I won’t comment on the buyer’s virtues or opinion about his ethics or lack thereof. vices, known or unknown, except to note that he

©2020 Epsilon Theory All rights reserved. 6 end and they would likely and rightly answer, [Psst. Wanna know sumthin else? The chains just “Yes, many”. Alas, at least one link in Lehman’s referenced have menacingly weak links still, with managerial chain circa 2008 proved fatally weak, deep-pocketed parties willing to accommodate bringing that entity’s 158-year life to an end and hurried sellers of corporate credits, or more bringing as well the global financial system to its precisely the evident paucity of such parties, knees. being perhaps the weakest links now and for the foreseeable future. Counting on such liquidity Whether Lehman’s fatally weak link was ever as providers to appear when needed would be as strong as his nickname (Gorilla) suggested is a wise as counting on the Astros or Red Sox to win question meriting careful contemplation by this year’s World Series. Either team could go all anyone entrusting anything of value — capital, the way. But the odds ain’t great either will do careers, passions or other valuable things so.] including votes — to persons or human constructs of any kind whose inner workings Not wishing myself or others to move through they don’t know intimately well. the Twenties or beyond as Henry Kissinger has moved through his uniquely interesting life — [Psst. Were you “short vol” when the infamous never reposing full trust in any person or entity XIV ETF blew up in March 2018, imperiling all — I won't suggest here that readers (or I) mimic investors who’d bet stock index volatility would Kissinger’s modus vivendi. Echoing Rusty in the remain subdued, including those who’d never aforementioned ET post on incentives, however, owned nor even heard of XIV? Many such I will suggest that never works well as the default punters had no idea their fortunes depended to response to financial, emotional or political an imprudent degree on the tensile strength of appeals from persons or entities whose an inherently weak link in the endless and superficial soundness may mask major impossibly tangled chain connecting seemingly weaknesses. discrete asset classes and their derivatives to End each other.]

Conspicuously weak links

Up next: TBD after MLB completes its investigation of the 2018-2019 Red Sox (ugh)

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