Stepping up to the plate – Ted Seides on investing and baseball
Ensuring you have enough ‘at-bats’ – or opportunities to score – as an investor is just one of the baseball references cropping up in our recent podcast conversation with major-league podcast host Ted Seides
From the consistent and disciplined playing style of Leeds United to the chances (now nil) of a Manchester City ‘quadruple’ this season, football has of late offered a rich seam of analogies, here on The Value Perspective. In the latest episode of our podcast, however, it is baseball that is the instinctive go-to sport of guest Ted Seides – the author and investor whose success as a financial podcast host we can only dream of.
At one point in our conversation, for example, we asked Seides for his thoughts on ‘pot stakes’ – a poker term that essentially weighs up the amount you are being asked to stake against the pot you ultimately stand to win. To put it another way, people tend to focus so hard on their chances of winning, they can overlook how the sum they are being asked to bet is decisively dwarfed by the sum they could end up winning.
Is this something investors should be factoring into their thinking? “I think you have to,” Seides replies. “It’s not just about win or lose – or, in my favourite baseball analogy, it’s not just about batting average. It is about batting average and slugging percentage – that is to say, both probability of success and magnitude of success. In a probability tree, you can’t just have the percentage, you have to have the order of magnitude.
“And then you multiply those two numbers together and that is how you reach your range of outcomes. Now, that may be easier to describe in stockpicking – if you have a more concentrated portfolio, for example – than it is in other areas of investment. If you are investing in a group of managers, say, it may be tougher to weigh that out but it remains an important part of the process of assessing an investment decision.”
This seems an opportune moment to ask our guest about diversification – is he more inclined towards running a very concentrated portfolio or taking smaller positions in a greater number of stocks? Seides, who spent a significant proportion of his career managing funds of hedge funds, approaches the question from a different angle, however, arguing there is no single ‘right’ way.
“What matters far more is the deep authenticity of the person managing the money,” he argues. “For example, the manager who is more risk-seeking at heart but who diversifies their portfolio because they think that is what their clients want will end up very frustrated. You need that alignment between the strategy and the behavioural temperament of the manager.
“There is no set rule that 80 stocks, say, is better than 20 stocks – sometimes it will be and sometimes it won’t. We will never know the answer to that question for sure as there is just too much noise. Investment is a people-driven business and so, when it comes to the allocation side, this is one of the key factors you have to be sure about – that the person managing your capital is doing it the way that is best suited for them.”
Referencing the observation of US economist Peter Bernstein that the essence of risk management lies in maximising areas where we have some control over the outcome while minimising areas where we have no control, Seides continues: “You cannot change the fact there will only be one outcome – but you can do your homework, understand the base rates, understand the probabilities and then arrive at an average.
How much risk?
“The question then becomes – how much risk do you want to take? The more concentrated your portfolio, for example, the more work you have to do to understand with a greater degree of confidence what that outcome would be. Does your probability distribution of outcomes get more narrow because you understand a business deeper than you would if you owned 80 stocks? Maybe it does, maybe it doesn’t.
“That comes down to risk tolerance. It is not a question of wanting to get to the average in that case but of whether you want to take the risk of being different – but with the chance of outperforming significantly. Or – though you might be right in your process, if this is one of the times you get the wrong outcome –underperforming. The combination of investment results and the investment business is very tricky.
“In that same situation, if you run a concentrated portfolio and on average you are going to be right, what you need is duration – what you need is a sufficient number of ‘at-bats’ to reach your long-term outcomes. That means your clients need to understand very deeply what it is you are doing so that, when you do have those bad outcomes – in the process of getting to a longer-term good outcome – they stay the course.”
For those for whom baseball is not a first or second language, ‘at-bats’ equates to an individual batsman’s innings in cricket – and, by extension, the opportunity to make a score. Sometimes that opportunity is taken, sometimes it is missed but if, as with value investing, you have a system that works – on average and over the longer term – then the more chances you have to ‘swing your bat’, the higher your eventual score should be.
Juan Torres Rodriguez
Fund Manager, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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