If the Lord were a pitcher, he would pitch like Pedro [Martinez].
— Pro baseballer David Segui
Plagiarism is the cardinal virtue of investing.
— Pro investor Jeremy Grantham (?)
Trivia Question #5 of 108: Which of the following phenomena has occurred just once since the inception of Major League Baseball (MLB) in 1876? When choosing among the options listed below, note that in 143 years of MLB competition, 217,082 games have been played, with well over 30 million pitches thrown during almost 15 million at-bats.
A – A player’s mother hit and injured by a fouled-off pitch thrown by her son on Mother’s Day.
B – A spectator hit and injured by two foul balls hit by the same batter in a single plate appearance.
C – A player killed by a pitch.
D – All of the above.
Among the many things investing and pro baseball have in common, perhaps foremost among them is a rich tradition of purposeful mimicry: a conscious copycatting of methods that have worked well for the persons who devised them originally and that can presumably be put to good use by others, competitors not excepted. Of course, some methods are harder to mimic than others, including the idiosyncratic approach to pitch selection and execution employed by Pedro Martinez during his Hall of Fame career, or the equally inimitable approach to capital deployment employed by my former partner and valued mentor Jeremy Grantham. Jeremy has served up so many witty and wise tidbits about investing since my path first crossed his 35 years ago that I’ll credit him as the original utterer of the above wisecrack about our shared profession’s cardinal virtue — even if Jeremy borrowed it from someone else or, contrary to my recollection, never uttered it as quoted here.
If indeed Jeremy borrowed the wisecrack in question from another sage, that act might be the only instance of his having engaged in plagiarism, trivial or otherwise: like select pros in both baseball and investing who are properly deemed original thinkers, Jeremy constitutes an exception proving the rule that copycatting of demonstrably successful methods is a logical means of gaining an edge in either of the two arenas on which these notes focus — baseball or investing.
The problem with copycatting, of course, is that it’s not a wholly reliable means of getting ahead in either baseball or investing — endeavors in which 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 Problemand 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 persons on whom the trivia question above focuses. Sadly, the correct answer to that question is D — All of the Above — Hall of Fame pitcher Bob Feller’s mother having been smacked by a fouled-off pitch thrown by her son on Mother’s Day 1939; Richie Ashburn of the Phialdelphia Phillies having hit spectator Alice Roth with two bone-breaking foul balls in a single at-bat in 1957; and Ray Chapman having been killed by a pitch in 1920 under circumstances worthy of contemplation by risk-takers of all kinds, including especially those of us — perhaps most of us? — inclined to mimic others’ winning ways rather than attempting to fashion our own.
Amazingly, on the very day that Chapman got beaned, a how-to manual for young baseballers was published featuring images of Chapman and other MLB stars doing things that gave each of them a presumed edge. Chapman’s highlighted forte was a batting stance that the manual’s author (baseball writer par excellence John Sheridan) deemed “the perfect model for all baseball players in his position at the bat.”
Alas, such athleticism was of no help to Chapman during his ill-fated final at-bat, confronted as he was by a pitcher — Carl Mays — whose “submarine” delivery made it hard for even skilled batsmen like Chapman to see let alone hit balls Mays flung toward them. Chapman’s difficulties that fatal day in 1920 were compounded by a heavily soiled ball — an acute hazard for batters obsoleted by rules changes catalyzed by Chapman’s death, to the unending gratitude of ball purveyors enriched by MLB’s post-1920 policy of jettisoning balls showing the slightest signs of wear and tear. Unable to see the pitch that ultimately killed him, the normally nimble Chapman remained immobile during the roughly half-second it took for the ball to travel from Mays’ hand to his unprotected skull. (Batting helmets hadn’t yet been invented and didn’t become mandatory in MLB until 1970).
What useful lessons if any might wannabes in baseball (or investing) like me (or you) draw from Chapman’s untimely beaning? Two such lessons come to mind — both easily synopsized and both serving as useful segues to the discussion of conscious copycatting’s perils that constitutes the remainder of this note.
The first lesson gleanable from Chapman’s final at-bat is perhaps obvious: beware changed boundary conditions that render proven methods useless at best and hazardous at worst (e.g., a darkened ball hurled in a highly unconventional way).
The second lesson is more subtle but even more germane to the sorry and indeed ongoing saga of the sizable slice of investors who’ve tried and failed to “be like Yale”: beware the use of demonstrably successful methods bereft of their central virtues.
[Readers puzzled by my use of slice in the prior paragraph are hereby reminded that it’s the collective noun for a group of lemmings.]
Until Mays’ pitch hit him, Chapman’s final at-bat didn’t differ in kind from his 3,794 prior trips to the plate, 1,053 of which resulted in hits and all of which purportedly entailed Chapman’s assumption of the “model” stance referenced earlier. In hindsight, that stance was a necessary but insufficient condition for Chapman’s success and ultimately survival as a batsman.
This isn’t to say that a baseball wannabe like me or indeed even the most nimble batsman might have dodged Mays’ bullets more successfully than did Chapman on August 16, 1920. Rather, it’s to say that extraordinary success in most fields of endeavor typically presupposes proficiencies that include but go beyond those susceptible of codification and copycatting — copycatting of the sort undertaken by wannabes convinced that a given “model” will surely yield results for themselves as stellar as those achieved by the model’s initial user(s).
The point just made — the chief point of this note for sorry souls who care little about baseball but lots about investing — was not coincidentally also the chief point of a review of Swensen’s pathbreaking book on institutional investing (Pioneering Portfolio Management) that appeared in Barron’s at the time of its initial publication in 2000:
Rooted as its success is in the idiosyncratic personality of the man who fashioned it, the ‘unconventional’ money management approach that Swensen extols is anything but a guaranteed path to profit for institutions lacking such talent. Indeed, numerous fiduciaries are likely to read this book and do precisely the opposite of what Swensen advocates: commit excessive sums to market niches whose strong past performance has removed the discomfort associated with truly superior investment opportunities. [Ed.: highlight added]
I’m certain the seer bloke who wrote the review just quoted won’t object to my highlighting of Swensen’s idiosyncracies (more on which later) — because that reviewer was me. How well did my review of Swensen’s masterwork foretell its eventual impact on institutional investing? Fairly well, I’d argue, given the massive movement of institutional capital since the book’s publication into two forms of investing that Swensen has long favored: absolute return oriented hedge funds (AROHF) and private equity (PE). (N.B.: As did Swensen from the start of his tenure as Yale’s CIO until recently, I’m using PE in this note to encompass investments in non-listed companies of all kinds, regardless of stage.) For good and important reasons, Yale doesn’t disclose how individual managers it employs have performed. But a careful review of the superb reports that Swensen’s office has published since 2000 confirms that a key tenet of the investment philosophy David devised for Yale during his opening years as its CIO and has implemented faithfully throughout his tenure in that post has proven sound: favor forms of investing entailing superabundant dispersion of returns among investment pros engaged in such activity.
Can skilled allocators like Swensen and the select band of other institutional CIOs trained by him continue booking uncommonly plump profits through savvy manager selection and sizing, especially in the ARO and PE arenas? For reasons discussed below, I wouldn’t bet against the leader of this particular band, nor its other members, even if the challenges confronting ARO managers that Ben flagged in Three-Body Problem and the overfunding of PE strategies that Rusty flagged in Deals Are My Art Form persist.
What I would bet against is the achievement of hoped-for returns by an ever-expanding legion of Yale wannabes — investors marching along the path depicted in the middle panel of the table furnished at this note’s end. Prepared originally for an essay by yours truly on the real Yale model and its generally ineffectual copycatting by Swensen wannabes that’s available on request, the table just referenced also talks my own walk, if you will, flagging salient features of my preferred approach to deployment of long-term capital (A Third Way) as this not unhappy century continues to unfold.
Wait: given the growing centrifugation of markets and politics that Ben chronicles so convincingly in Things Fall Apart, how can conscientious capital allocators or citizens more generally be anything but unhappy about the century now unfolding?
A few palliatives come to mind.
The first such palliative has been and remains readily available at zero financial cost: root for the team that’s won more World Series crowns than any other this century and seems well positioned to win more.
|Key Tenets of The Yale Model |
• Favor equities over bonds – ownership over creditorship
• Favor inefficient markets – as measured by dispersion of active manager returns
• Sacrifice liquidity – as a necessary means to the end of exploiting inefficiencies
• Diversify — to a prudent but not excessive extent
The second such palliative has been in shorter supply than the one just described since the current century dawned, though easier to come by over the last decade than I if not also most investment pros would have predicted if pressed for a forecast as the grim holiday season of 2008 was unfolding. The palliative in question? Stick one’s nose into the fee trough for purveyors of alternative investments! Constantly replenished as this trough was via massive funding of ARO and PE managers in the decade following publication of Swensen’s book in 2000, it continues to enrich many investment pros despite headwinds for ARO investors resulting from easy money policies pursued by major central banks throughout the current decade.
The third and final palliative for discontent in these disquieting times worthy of mention here is truly scarce — scarcer indeed than the analogous remedy for like ills being pursued by a growing number of MLB teams vexed by their underperformance in recent years. Mindful as they are that this decade’s most memorably successful teams have relied heavily on draft picks to reach the top, the wannabe teams in question are essentially sabotaging themselves in order to hasten their rebuilds.
The problem with such a strategy or model — which has undeniably worked well for the Astros and Cubs if not also another World Series winner in recent years that modesty prevents me from identifying by name here — is that the supply of potential draftees capable of reversing an underperforming club’s fortunes is deceptively small. Indeed, such supply is even smaller than the supply of PE wunderkinds who’ve contributed so heavily to the Yale endowment’s success since Swensen wrote the book on picking such pros nearly two decades ago: as a careful review of the aforementioned annual reports from Swensen’s office will confirm, Yale has booked uncommonly large gains from PE investments (as well as ARHOFs) during David’s tenure as its CIO, with the lion’s share of such value-added derived from that portion of Yale’s PE program dedicated to venture investing.
No one knows whether or for how long Yale will perpetuate its hugely successful record of backing winning managers, especially in private markets and most notably in the subset thereof comprising early stage investments. That said, presuming as I do that Yale trustees are wise enough to let David continue serving as Yale’s CIO for as long as he wishes, I’d take the over on Swensen’s continuing success, today’s widespread copycatting of codifiable if not also quantifiable elements of Swensen’s winning “model” notwithstanding.
Of course, the most readily quantifiable element of the Yale model as devised and implemented by Swensen is also its most inimitable: its inventor’s long and ongoing tenure as Yale’s CIO — 33 years and counting. As a future note on “coaching trees” in baseball and investing will argue, long CIO tenures like Swensen’s typically produce “compounding” in ways and to degrees not readily apparent to persons not engaged in institutional funds management. Uncommonly long and successful tenures like Swensen’s also make plain to serious students of the methods underlying them what casual observers of such labors typically miss, namely the relentless quest for excellence in which the very best players are continuously engaged.
I discussed the personal qualities animating Swensen’s manifest quest for excellence in the review of his book mentioned above and will return to such attributes before closing this note. Before doing so, however, I’ll give myself and readers who fancy such jollies a holiday gift by spinning briefly parallel tales involving baseballers whose long and successful careers owed much to their own relentless quests for excellence.
As all good and perhaps most other Americans are aware, Cal Ripken played in more consecutive games than any player in MLB history (2,632), compiling 3,184 hits in 11,551 at-bats over the course of a career in which “The Iron Man” employed 20-odd different batting stances. As the accompanying photos hint, none of Ripken’s stances were as distinctive as that of the acknowledged king of strange stances, Kevin Youkilis. But all of Ripken’s many stances as well as the one and only stance “Youk” used during his salad days in The Show provided a sound foundation for what batting icon Ted Williams called “the single most difficult thing to do in sport”: make solid contact with baseballs thrown by competent big league pitchers.
Tellingly, notwithstanding his own ample athleticism and masterful mimicry of star hitters’ stances in countless paid gigs over the years, Gar “The Batting Stance Guy” Ryness has never had an at-bat in a real baseball game above the high school level. He’s never been so blessed because he’s never developed what Ripken, Youk, and other effective batsmen throughout MLB history have worked hard to hone: a repeatable process for moving their bats through the hitting zone in a manner conducive to making solid contact with baseballs thrown by big league pitchers, regardless of how factors beyond their control or indeed self-initiated changes in their pre-swing postures shape up.
If the paean just offered to getting crucial deeds done in a repeatable and effective manner reads like it was lifted from every checklist you’ve ever used seen for vetting investment pros, that’s by design. How many such pros work as intensely and tirelessly as Ripken and Youk did during their playing careers to hone methods enabling them to perform key tasks with extraordinary effectiveness? Not many, IMO. How many investment pros who fill the bill just submitted have engaged in such intense honing for as many years as Ripken did after achieving fame if not also tidy fortunes? A vanishingly small number in my opinion and experience, albeit with two pros already saluted in this note being conspicuously among them: Jeremy Grantham and David Swensen.
Leaving fun and happy tales of certain close encounters I’ve had with Jeremy for future notes, I’ll recount briefly here one such tale involving Swensen, plus a similar tale involving arguably the greatest and unarguably the most intensely competitive third baseman in MLB history.
About a dozen years ago, I accepted an invite from David to grab lunch with him following a squash match between us on Yale’s courts that included a long and crucial point that ended with a muffed shot by Swensen. Midway through lunch, his attention drifted. He grew silent for a spell, stared down at the table, smacked an open palm on it, and muttered unsmilingly, “Damn. I should’ve won that point, not you.”
Wannabe as successful deploying capital via coveted managers as Swensen has been and continues to be? Study his book and the Yale endowment reports commended above all you want, mimicking to whatever extent you wish the methods Swensen has employed in his tenure as Yale’s CIO. Absent an intolerance of mediocrity rivaling Swensen’s, I’d respectfully suggest, I doubt you’ll be as successful as he’s been, or as you wannabe.
This same intensely competitive mindset was evident the day my path crossed that of Hall of Fame third baseman Mike Schmidt, on the 18th hole of his home golf course in Florida. As my playing partner and I were strolling up the fairway after hitting our tee shots, we were puzzled by the sight of a cart racing up the fairway toward us. Stopping the cart about 150 yards from the 18th green, its sole occupant leapt out of the cart, dropped a golf ball on the turf, quickly took a stance with the only club he’d brought along, and proceeded to hit the ball to within “gimme” distance of the hole. Spinning around to face my playing partner and me as we came up behind him, Schmidt growled, “I knew I had that shot. You can keep the ball.” Schmidt then jumped back into the cart and roared off to the clubhouse. Upon reaching it a few minutes later, my companion and I learned that a poorly struck approach shot on the 18th had cost the baseball legend a win in a high stakes match contested as our own round was underway.
Small wonder that a man pursuing excellence so relentlessly made it into his chosen profession’s Hall of Fame — a just honor for a twelve-time All-Star and three-time league MVP who averaged the same number of home runs per season during his 17-year career in the big leagues (32) as Babe Ruth did during his more celebrated albeit longer (22-year) run in The Show.
I’m sending Ruth to the plate so to speak as this note draws to a close because aspects of his remarkable life underscore nicely this note’s central point, i.e., that extraordinary success in most fields of endeavor presupposes proficiencies that include but go beyond those susceptible of copycatting. The Bambino proves this point because, in sharp contrast to his fellow Hall of Famer Schmidt, whose batting methods were truly distinctive, Ruth the batter was a copycat to the core. More specifically, from his earliest days playing sandlot ball at St. Mary’s Industrial School in Baltimore in the opening years of the 20th century to the end of his storybook career in 1935, Ruth parroted precisely and faithfully the stance, swing and even pigeon-toed gait of his first mentor on the diamond and his only true mentor off it: Brother Martin “Matthias” Boutlier.
To be sure, the techniques that Ruth borrowed from Boutlier did Ruth relatively little good during the first half-dozen of his 22 seasons as a big leaguer — the closing years of MLB’s “dead ball era” during which Ruth averaged fewer than nine homers per season. Fortunately for Ruth, and the MLB team that employed him prior to 1920, Brother Matthias had seen to it that his prized mentee at St. Mary’s had also honed top notch pitching skills — skills acquired when Boutlier shifted Ruth from outfielder to pitcher after Ruth complained about a classmate’s ineffectiveness on the mound.
To Ruth’s if not also Boutlier’s credit, when MLB’s “live ball era” commenced, Ruth had little difficulty adapting to his radically changed environment, switching back to the outfield when playing defense and applying his hard-earned baseball savvy and skills more or less solely to the task of driving in runs. In this pursuit, he succeeded admirably, notching an astounding 1,990 RBIs (runs batted in) as a “live ball” hitter.
What would’ve come of the Bambino if more tightly wound balls hadn’t been introduced in 1920 or subsequent years? ‘Tis hard to say, though presumably Ruth would’ve carried on as a premier pitcher until his arm … or liver … gave out.
What would’ve come of Ray Chapman if he’d done the right but potentially embarrassing thing and dropped pre-emptively and safely to the ground upon losing sight of the pitch that killed him? ‘Tis also hard to say, though presumably Chapman would’ve gone on to compile an enviable if not Cooperstown-caliber record as a batsman if he’d lived and played through the first several years of “live ball” competition.
What would’ve come of Jeremy Grantham if he’d done the easy thing and kept the firm he’d co-founded in 1977 heavily invested in small cap stocks as they were reaching the zenith of their popularity six years later? In the event, Jeremy did what’s he done not a few times over the course of his career: outflank the competition by replacing demonstrably winning tactics with those entailing sufficient discomfort to justify fresh funding. Doing this in a timely and effective manner presupposes a distinctive mindset: one resembling closely if not perfectly the mindset animating David Swensen’s ongoing labors on Yale’s behalf, and the mindset of Swensen’s countless wannabes not at all.
Finally, what would’ve become of the PE industry if, instead of devoting a large fraction of Yale’s endowment to PE, David Swensen had deployed all such capital via managers investing exclusively in publicly-traded stocks of owner-operated firms? ‘Tis hard to say, but I’ll try … in my next note.
On deck: hittin’ em where they ain’t
PDF Download (Paid Subscription Required): Notes from the Diamond #5 – Wannabes Beware
 ET management frowns on too-frequent shout-outs to the MLB franchise in question, so I won’t mention by name here the team that’s won four of the 19 World Series held since the current century commenced, including the most recent. [ET management note: sigh.]
 As ET faithful know, Ben and Rusty use italicized shout-outs like alternative investments! when referencing self-sustaining memes whose acceptance tends to be both uncritical and widespread. Private equity circa 2018 exemplifies such a meme — still “bucketed” as “alternative” by many institutional investors and consultants thereto despite its near-ubiquity in institutional asset mixes. Hedge funds remain similarly “bucketed” in institutional investment — and might ultimately merit such labeling anew if recent trends disfavoring such vehicles render them sufficiently upopular. Readers seeking greater understanding of italicized shout-outs by ET contributors might usefully review the note by Ben in which they first appeared.
 Perhaps the most time-efficient means that skeptical readers can employ to verify characterizations of Yale’s investment results proferred here would be to peruse two of the 17 annual reports on Yale’s endowment posted on that school’s website: the 2007 edition and the most recently released edition, for FY2017. Section 5 of both reports, entitled Investment Performance, breaks out Yale’s returns by asset class, reporting such returns over various intervals, including the 10-year periods ending in the fiscal year being reported upon. By essentially linking asset class returns for the 10-year periods discussed in Swensen’s 2007 and 2017 reports, one can confirm what all of Swensen’s putative peers have long known: that David and his team are uncommonly good at picking managers within investment niches characterized by wide dispersion in active managers’ returns.
 According to the Yale Endoment report for FY2017, Yale earned a dollar-weighted IRR of 106.3% and a time-weighted return of 25.5% on its venture investments over the 20 years ending June 30, 2017.
 Planting his feet as far from the plate as rules allowed in order to avoid being “jammed” by inside pitches, Schmidt typically would turn his back toward the pitcher and pull his butt back and forth while awaiting deliveries, thus staying loose while also distracting or at least trying to distract his enemy on the mound.