The Fundamentals
This time of year I watch a lot of baseball. The pennant races followed by the World Series offer some of the finest games of the season. This year, the Atlanta Braves surged to victory in the National League while the Houston Astros repeated their American League winning tradition. Watching these teams, it was clear that they were the best teams playing the best fundamental baseball. They both have solid lineups, including powerful bullpens and a potent batting lineup, that make them fun to watch. A few games showcased pitchers, while other games were run-filled, thrilling, back-and-forth bouts.
Baseball analogies in the investment business are ubiquitous. Fundamentals matter in baseball – advancing the runner, hitting a sacrifice fly, and throwing the ball to the cut-off man. Fundamentals matter in investing too – how much does a company earn? What is the profit margin? What are the dividend and earnings growth rates? Failing to execute the fundamentals in baseball leads to poor results just like failing to understand the fundamentals in investing leads to weaker outcomes. Good defense wins baseball games just like smart asset allocation helps investors weather market volatility.
One of the most interesting facts about this year’s World Series involves the managers. The Astros are managed by Johnnie B. “Dusty” Baker while the Braves skipper is Brian Snitker.
Baker and Snitker were players back in the day – Snitker had a brief and unremarkable minor league career while Baker was an All-Star for the Dodgers. Baker and Snitker are considered old-timers, and their combined ages (72 + 66) represent the oldest managers to pair up in a World Series. They’ve both lived through multiple eras of the sport. Baseball has changed significantly in recent decades with the use of “Sabremetrics,” the term used for analyzing baseball based on mass amounts of player data.
I am a reluctant fan of Sabremetrics. This quantitative analysis of baseball allows for a deeper analysis of a player’s contributions to his team and better predictions of future performance. Is the analogy becoming clear? The equivalent is quantitative investing where portfolios are designed by and trading is based on computer algorithms. Quantitative investing has caused a sea-change for investors. I am not convinced that this change has been all good for the markets, but I do know that quantitative analysis and trading improve market efficiency most of the time.
I also believe patient investors, who apply their own disciplines to their portfolios, are able to capitalize on opportunities created by computer-driven methodologies. Baker and Snitker are wise old owls who have great baseball instincts. They also know how to use the data provided by Sabremetrics. Smart investors also use experience and instincts and selectively employ modern, quantitative techniques. Baseball has changed and so have the markets. I guess we call this progress.
Finally, I feel compelled to add that with the Dow Jones Industrial Average and S&P 500 trading at all-time highs, it is time to play some defense. Watch your asset allocation. Know the fundamentals….and execute on them. And please don’t swing for the fences and wind up striking out. This old-timer is sharing his view from the dugout, and trying to help you manage your assets wisely so that YOU win your game when it comes to long-term financial security.
Ralph McDevitt November 2, 2021
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James.
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, sell or hold a specific security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss.
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