IFB10: Making a Quant Investing Approach Inspired by Baseball Sabermetrics

Baseball and value investing have much more in common than one would think at first. The discipline and analyzation that you find in baseball can correlate to value investing quite easily. Great hitters like Ted Williams, Tony Gwynn, and Barry Bonds were extremely disciplined in their approaches and did an extensive study of the pitchers that they faced. All of this lead directly to their success, as well as their incredible talents. Great value investors like Warren Buffett have taken these ideas and adapted them to their value investing style. Using quantitative investing is the investing version of sabermetrics. Numbers can tell a story and value investors use quant investing to help tell that story.

* Value Investing and baseball have more in common than you would think.
* Ted Williams was the first player to take a scientific approach to hitting a baseball
* Warren Buffett adopted these ideas to his investment philosophy.
* Patience is key to being a great investor
* Intrinsic value is found everywhere
* Keeping your mind open to any possibilities can lead you to unexpected investment ideas.
* The study of numbers or quant investing is the investing version of sabermetrics used in baseball. 

 
Dave: Welcome to session number 10. In honor of the baseball season starting this coming Sunday we are  going to talk a bit about baseball and investing and how they go together. That may be a strange topic for some people, I am sure we are getting some funny looks from people as they are listening to this.
But you would be surprised there are some very strong correlations and a lot of big value investors are very big baseball fans and they use a lot of analogies about baseball and how they look at their investing. They get a lot of great ideas from baseball and some of the strategies as well as the discipline that baseball players adhere too.
 
I will start and talk a bit about an article that I wrote just recently about Ted Williams and value investing. And for those of you not familiar with Ted Williams. First, of all, he is probably considered, in a lot of baseball circles the finest hitter in the history of baseball. Better than Babe Ruth, Willie Mays, Hank Aaron and he has the numbers to prove it. He played from the late ’40s thru the mid-’60s and he was the last man to hit over .400, and he hit .406 in 1941 and it has not been done since. So that is over 66 years since it was last done.
He was really the first guy to study hitting as a science and he was a huge influence on scores of players who followed him, most notably Tony Gwynn. But Williams was the first guy to take baseball and apply science to it and analyzation.

Andrew: I think that is key when you think about people that are excellent at their craft. There is this theory called the Prado Principle where 20% of the top performers make up 80% of the results. We see that in economics, and in the Olympics, where you see someone who is a half a second faster gets a far greater proportion of the results than the rest of their competitors. If you can study the greats you can see that a lot of the principles are shared, whether that’s baseball, chess, or investing. It’s something that you can study “peak performers” you can really glean a lot of things that you can apply to your own situation.
 
Dave: Great points. Before Ted Williams, most players hitting philosophy was “see the ball, hit the ball”. They didn’t study, they didn’t pay any attention to patterns, they just went up and swung the bat, hoping for a hit.
One of the things that Williams did was to break the strike zone down into 252 small little baseball sized zones. And he figured out that in certain zones he was much more successfu...