By Guest Blogger Doug Rowat
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It looks like Billy Beane may be finished with the Oakland A’s.
Reports earlier this month suggest that Beane, famously credited with the low-cost, value-based Moneyball approach to Major League Baseball team-building, may be forced to resign from the A’s due to conflicting business interests with his investment firm, RedBall. If he does indeed resign, he’ll leave an impressive legacy.
Since Beane joined the A’s full-time as general manager in 1998, the A’s have won seven division titles, played in 13 postseason playoff series including wildcard games and produced the sixth most wins in baseball and did it all, as per the Moneyball method, at very low cost. The one criticism of Beane has always been the A’s lack of playoff success and World Series titles, but as Beane has bluntly put it: “My sh-t doesn’t work in the playoffs. My job is to get us to the playoffs. What happens after that is f-cking luck.”
According to FiveThirtyEight, Beane’s teams actually should have had, statistically speaking, a bit more success in the playoffs than they did; however, his point is well taken. A large sample size is what truly reveals a strategy’s success. What happens in the short term is basically a coin toss. As Beane has also said, a full 162-game baseball season tends to eliminate randomness.
Naturally, the same holds true with investing. Short-term market timers are almost as likely to lose as to win on any given trading day while long-term investors have a much higher likelihood of profiting. Simply put, the long-term investor also largely eliminates randomness:
S&P 500: the shorter your holding period the more you rely on luck
Source: Bloomberg, Turner Investments. S&P 500 pricing data from January 1928 to present
Keep in mind also that the above table doesn’t include dividends, so when these are factored in, the likelihood of a long-term investor earning a profit rises even more. An S&P 500 investor with a 10-year time horizon, for example, should actually expect to profit more than 90% of the time.
Appropriately enough, given this week’s topic of Billy Beane and his low-cost Moneyball approach, the latest SPIVA Scorecard was also released this month and, once again, it proved overwhelmingly that paying more doesn’t necessarily mean better results.
SPIVA stands for S&P Indices Versus Active and its Scorecard measures the performance of actively managed funds against their relevant benchmark indices. What makes SPIVA great is that it corrects for survivorship bias, so if a fund closes due to poor performance, which happens constantly in our business, SPIVA makes sure that this performance is accounted for and not just quietly swept under the rug thus skewing the fund industry’s overall performance data. Here’s what the latest (released mid-October) SPIVA report had to say about Canadian mutual funds:
Although this volatile period offered ample opportunity for stock-pickers to shine, 88% of Canadian equity funds underperformed their benchmarks over the past year, in line with the 90% that did so over the past decade….
Canadian Equity funds were particularly notable for their level of underperformance. On an asset-weighted basis, Canadian Equity funds returned a dismal 7.9% below the S&P/TSX Composite over the past year, the worst relative performance of any fund category.
The story, of course, is much the same with US equity mutual funds, with the main cause of any mutual fund’s underperformance being its high cost. Whether you’re building a baseball team or building a portfolio, the one lesson we can learn from Billy Beane is to never overpay. And with mutual funds, generally speaking, that’s all investors are ever doing.
Stick with low-cost ETFs.
Smart investing’s no different than smart baseball: never pay more for a worse result.