After reading David G's latest installment of ‘Moneyaballing the Financial World’, I couldn’t help but relate baseball to my chosen investment strategy here under my SpartanMAC moniker. In his classic book, Michael Lewis writes about how Billy Beane and his staff were able to discover that the two most important statistics associated with run production are On Base Percentage (OBP), and Slugging Percentage (SLG). By honing in on two ratios, Beane was able to cut through a lot of performance masking distractions (‘he has a good face’) to find good hitters. In essence, he wanted to know if a prospect could get on base, and if he could hit for power. Thanks to Bill James (the father of Sabermetrics), Beane, and even Lewis these two baseball metrics are very popular now. As many are aware, the two have been combined to form one metric ‘On Base Plus Slugging’, or OPS. When ‘Greenblatt’ style investors (see MagicDiligence, ZiggyDawg, and TrackJGreenblatt) are looking for good stocks (read ‘hitters’), we too are honing in on two simple, straightforward metrics (Earnings Yield, and Return on Investment Capital). Although you can associate OBP and SLG to either earnings yield or ROIC, I like to think of a high earnings yield as OBP. Simply put, you want to lessen your chances of paying too much for a company. You want to get on base with this stock. High ROIC is the sexier of the two in my opinion. It means as a company, you can crank out the green. It means you have ability to go yard with the way you invest your money. The market digs companies that can invest capital in an efficient manner. Put them together, and you have your financial OPS. We want high OPS stocks. Think Albert Pujols, Jose Bautista, Matt Kemp, and Prince Fielder. Granted, if you were a general manager, and you only drafted and traded based on OPS, you would probably have some busts. And busts are a ‘plenty when you follow the Greenblatt strategy (you only beat the market roughly 50% of the time). But over time, your winners turn out to be big winners. Given this fact, I like to channel my inner Earl Weaver….the hall of fame manager who ignored popular strategies such as stealing bases and the hit and run. Instead, he opted for great defense, and the three run homer. We’re hitting three run homers with this strategy, but you have to be patient like Weaver, and Beane. With all the distractions in the media today regarding how to pick winning stocks, it’s easy to lose sight of the basics, and what works. If you have the fortitude to stick to your guns over a long period of time, you can be a consistent playoff contender when it comes to your portfolio. The great news here is that you have access to all the players in the bigs. [more]
I love this quote from Red (Morgan Freeman) in the movie 'The Shawshank Redemption' - "Geology is the study of pressure and time. That's all it takes really, pressure, and time. That and a big god-damned poster. Like I said, in prison a man will do anything to keep his mind occupied. It turns out Andy's favorite hobby was totin' his wall through the exercise yard, a handful at a time." It appears as though buying companies that are selling below their intrinsic value on a consistent basis (pressure) over the period of many years (time) follows Andy's model of breaking free with systematic yet dogged determination.
I've been a 'YES' man in CAPS since I started using this service. I'm going to continue to be a 'YES' man; however, I'm now going to systematically buy stocks that have a high return on investment capital and a high earnings yield (i.e. the Greenblatt Method). My score was up and down with my previous picks. I'm going to put this bird on auto-pilot....a new stock will be 'purchased' every 2 weeks. I'll pick stocks off of Greenblatt's list, but I will make sure a few ratios' check out before I enter my pick. Once I'm up and running, I should have 26 active picks throughout the year, and after one year I should be 'buying' and 'selling' one pick every two weeks. Let's see if the returns warrant all of those 'would be' trading fees. Thanks to ZiggyDawg for the idea of buying every two weeks for the right amount of diversification and DCA effect. [more]