In Basketball and Investing, Strategy Wins the Game

Written by Jonathan Citrin – March 23, 2009
Published by 55-Alive!

How do you gauge success? In sports, numbers and statistics have always been king; we judge professional athletes primarily based on a few familiar and well-established numerical guidelines. Points per game, batting average, and rushing yards have long occupied our attention and respect. Similar to investing, statistics in sports serve as the universally agreed-upon metrics used to coax order out of mayhem, occupying a place of prominence in the hearts and minds of spectators and fans everywhere. It has long been our belief that traditional statistics provide a reasonably good portrait of a player's talent and value to a team.

Or do they?

In today's internet-savvy world, statistics of all sorts are abundant and just one "click" away. Why, then, do we still cling to traditional statistical analysis when measuring team success (wins and losses)?

Author and NY Times writer, Michael Lewis has consistently challenged the assumption that conventional statistics and methods are enough to succeed. In one prominent piece, "The No-Stats All-Star" published February 2009 in the New York Times Magazine, Lewis profiles and analyzes Shane Battier, a journeyman forward for the NBA's Houston Rockets, and Daryl Morey, an MBA from MIT and the Rockets innovative young General Manager. The article takes a closer look at what constitutes true value in an NBA player, and turns an analytical eye on the seemingly coincidental relationship between Battier's presence on the court and his team's success.

What Lewis uncovers is evolutionary (perhaps even revolutionary): to a large extent, the success of the team is not governed by players with gaudy statistics, but by the positive synergies that result from the way in which all players mesh together to maximize opportunities, minimize mistakes, and generally make good things happen. Great teams are made up of more than just superstars, and every championship team shares one important trait: the whole is truly greater than the sum of its parts. All successful teams need great players of course, and All-Star performers obviously still play an important role in their team's success. What Lewis does is not to diminish great players, but rather to show — through Battier's example — that our understanding of what constitutes a great player might not be sophisticated enough.

It is no surprise that the implications of Lewis' thinking extend beyond the world of sports, and perhaps even less of a surprise that the journey from the sports world to the financial world is both short and direct. From the perspective of a professional investment advisor or financial analyst, the way Lewis assesses Battier's performance involves a number of considerations that are directly relevant to the way in which the relative value of an investment should be analyzed and a balanced portfolio constructed. In fact, a closer look at ideas discussed in "The No-Stats All-Star" reveals a number of keen insights and conclusions that convey important lessons for investors.

Whether putting together a winning basketball team or assembling a strong and resilient investment portfolio, the relationships between the pieces of the puzzle are just as important, if not more important, than their individual strengths. Like basketball players, investments do not perform in a vacuum. In the context of a portfolio or team environment, inherent complexities force us to constantly reevaluate what is of true value. Though Battier is not, individually, a great rebounder, he makes his team one of the best rebounding teams in the NBA when he is in the game. And, though Battier is not particularly quick of foot, he makes his team one of the best on defense when he is playing. Similarly, certain assets that may traditionally look like poor investments have the ability to make the whole of your portfolio one of the most efficient in the marketplace.

The concept of correlation — the degree to which different investments gain or lose value at the same time and for the same general reason — is not a new one, but Lewis' insights remind us of the critical importance of assessing how assets relate to each other when building a portfolio. The Rocket's General Manager, Morey, has devoted himself and his team to a strict belief in evaluating players and games based on comprehensive statistics rather than emotion. Morey has no skill for picking a player based on his height, weight, or rebounds per game. However, he passionately uses every statistic imaginable to evaluate players and their potential impact on his team. Investors must do the same for their portfolios.

Statistical analysis over emotion should direct investment policy. For example, there is no excuse for an investor not to analyze the volatility of an asset and whether it mitigates risk in a given portfolio (regardless of whether it is up or down). Specifically, some investors may investigate and subsequently complement big name "All Stars" like the Dow Jones and the S&P 500 with assets that have a low correlation to the US Stock Market, including Silver, Malaysia and Crude Oil. Historically, these assets tend to perform better when the major US markets do poorly. Moreover, certain assets that actually are poor performers individually, and therefore tend to be overlooked, can provide great diversification to the US Market. These assets include items such as the Japanese Yen, Cocoa, Inverse Agriculture, and Sugar. While these, due to lackluster returns, would typically look like a waste of time by traditional measure, they can be imperative to a well-constructed investment plan. They can, in fact, be the Shane Battier of your portfolio.

Basketball management generally overlooks a player's impact on the team's overall chances of scoring or rebounding; they simply look at individual statistics. Likewise, for years investors have allowed their portfolio access to only a traditional suite of investments based on the simple concept of recent rate of return. If anything positive comes from the current recession, it will hopefully be a heightened need for diligence in selecting any investment. Finding a high-scoring player is no longer sufficient to succeed in the NBA. And, simply buying an investment because it is going up, or selling stocks because the market is going down, are not reasons rooted in statistics, but in emotion. Every decision must find its root in an analysis that digs deeper than the surface.

As Michael Lewis makes clear, the innovative strategies and analyses practiced by Daryl Morey and the Houston Rockets provide us with a good road map of what thoughtful management looks like. Morey has the insight to see that Battier, a player who averages less than 5 rebounds per game, nonetheless provides the kinds of intangibles that make his team one of the most efficient rebounding in the NBA. And the Rockets? Despite missing key stars (Yao Ming and Tracey McGrady) to injuries in 2008, the team was able to put together the second longest winning streak (22 games) in the history of the NBA, and is enjoying another successful season this year.

For investors and their professional advisors, the lesson is clear. Those who understand the value of the all-around "Battier assets" that make the team better will find their portfolio, like the Houston Rockets, ready for the challenges of an ever-changing environment.

In a world of Fantasy Sports Leagues and Monday-Morning Quarterbacks, fans and spectators are ever more accustomed to traditional statistics that are only a piece of the big picture. A player's points per game are less important than his team's overall ability to score when he is in the game. And, an investment's recent returns, or that of the recent market, are far less important than a portfolio's proper diversification and ability to succeed even when its superstars are injured.

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