Notes from the Diamond #6: Hittin' 'Em Where They Ain't (Part 1)
February 14, 2019·0 comments
The most successful investment and baseball strategies eventually become traps. When David Swensen's Yale endowment model or sabermetric approaches deliver outsized returns, institutions rush to copy them. But the moment a strategy becomes standard industry practice, the edge that made it work vanishes. Managers pursuing Yale-style illiquid investing now have little chance of hitting their return targets. Not because the strategy was wrong, but because success made it crowded.
• Institutional funds are chasing returns they can't achieve. Many endowments want 4-5% annualized real returns, but their current strategies and Yale-model imitation offer little hope of getting there. The blueprint worked when Swensen deployed it. It fails when everyone does.
• The quantification of baseball destroyed what made it interesting. Sabermetrics and data-driven decision-making have pushed plate appearances from 74% (2003) to 68% (2018), while strikeouts climbed from 16% to 22%. Games are longer, more predictable, and solved by formula rather than intuition.
• The mechanism of failure isn't sinister. It's mechanical. Success breeds imitation. Imitation fills the niche. The niche fills up. Returns normalize. This pattern held for Branch Rickey's farm system (which became table stakes for every team), and it's holding now for every strategy that worked well enough to be famous.
• The best capital allocators understood something that spreadsheets don't teach. Rickey, Swensen, and the early sabermetricians succeeded by doing what competitors wouldn't or couldn't do at the time. By the time their methods became best practice, they were already looking elsewhere.
• The real question isn't which strategy to copy. It's where the next players are that nobody's found yet. If institutions want real returns over the next 35 years, they're not going to find them in the playbook everyone's already memorizing. The answer is coming in Part 2.
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