Why Launch Angles Are of Little Use in Long-Term Investing

There is a lot going on in the world these days, but from a stock market standpoint, it is a bit of a slow-news stretch. Data releases are sparse ahead of the long weekend. Q2 earnings season is done. The pullback is over and stocks are back to clocking all-time highs. So shall we go a bit left field and apply some observations about baseball to the market? 

You see, I love baseball. It is a lifelong relationship that will never end. But baseball is sleeping on the sofa right now. It has strayed and needs to figure things out. I have faith it will, but I might have to wait a while.

Like most sports, it was seduced by that tempting mistress, analytics. It all started with Bill James and advanced statistics in the 20^th century. That segued into the Moneyball phenomenon, whereby the Oakland A’s scouted hitters who excelled in certain narrow statistics in order to maximize the amount of runs they could buy with league-minimum salaries.

But like all widely known information in a market, it got priced in, leading teams to go deeper and deeper for the next statistical edge. As time passed, the collision of ever-powerful computers and clever front office nerds brought the game to where it is now: a myopic focus on pitchers’ speed, vertical rise and spin rates and hitters’ launch angles. Players optimize for this in order to win fat contracts. So now where we live in a world where Greg Maddux perhaps wouldn’t get drafted, pitchers hurl their elbows into oblivion, hitters swing with exaggerated upper cuts that would give my old little league coach a coronary, and at-bats are generally a two-outcome situation. Homerun or strikeout. To me, this makes most games boring no matter how much the league tries to speed things up. Oh, and with algorithms selecting relief pitchers, far less spontaneous.^[i]

These are, of course, just my views. You may agree or disagree. I am sure there are many in both camps or possible third camps that agree and disagree.

This is kind of a thing in sports these days, with fierce debate about whether it is for the better. Basketball is all about the almighty three-pointer. Tennis is about spin rates and Ben Shelton’s 150 mph serve. Formula 1 and IndyCar drivers scrutinize charts of their corner entry speeds compared to rivals and how many centimeters they were from the apex. Test drivers pull all-nighters in racing sims to find the optimal car setup. Data, data, data.

For an analogue gal like me, it is all a bit soulless and empty. I want scrappy middle infielders who bang doubles to the right field gap. The 1986 Astros playing small ball. Shawn Green’s diving catches and Ken Griffey, Jr.’s beautiful swing. I want Ayrton Senna mashing an H-pattern stick shift and keeping his foot on the gas while he brushes the wall. I want Roger Federer serving and volleying. I don’t want computers predicting and picking everything that happens.

There is a large school of thought saying markets have gone the same way. One MarketWatch piece we addressed in the What We’re Reading section last week delved into the vast universe of data younger investors seem to think they must tap to get an edge. And then there is the chorus of investors who have lamented for years that algorithmic traders hog all the opportunities, leaving no profits for investors who can’t automate trades.

Aaaaaaand, in my opinion, neither of those things is true. Investing is that rare arena where you don’t need supercomputers and reams of data to compete and do well. Technology hasn’t ruined anything.

Let us start with the obsession with data—including real-time market data, satellite data and other logistical-related information, options pricing, alternative economic data and many more. The MarketWatch piece we covered observed more investors leaning on this information for their research and decision making, implying every successful buy and sell decision relies on a boatload of number crunching.^[ii]

Hogwash! Don’t get me wrong, I love downloading and playing with data. But I—and all your friendly MarketMinder editors—do it to put things in context and assess whether the financial commentary world is broadly telling the right story about what the market and economy are doing. It is all in service to evaluating theses and narratives.

What won’t do me much good: poring over options pricing or a feed of minute-by-minute stock prices looking for patterns. Nor will studying container ship movement or other alternative economic feeds.

One, all of this stuff is too noisy. Two, it is all widely used and therefore likely to be priced in. All of this data is something anyone can use, which in markets means it becomes powerless. Once a broad swath of investors uses something, as they draw and base trades on the common conclusions, it all gets incorporated into stock prices.

This happened to Fisher Investments founder and Executive Chairman Ken Fisher with the price-to-sales ratio back in the 1980s. He pioneered its use in his early Forbes columns and classic book, Super Stocks. It was a simple calculation enabling him to find undervalued companies using a metric no one else used, exploit the inefficiency, and reap returns. Moneyball! But then the rest of the investing world saw that it worked and started using it … and it didn’t work anymore. It got priced in. He moved on.

So it is with all the new popular data. It is all past performance and widely known stuff. Whatever niche feed you scrutinize, you can bank on armies of similarly minded investors doing the same, probably coming to similar conclusions as you—and making the same decisions. Whatever trading insight you think you can glean, there is a high likelihood others have already traded on it. Meaning the market has already chewed over it, incorporated it into prices, and moved on.

I say this not to demoralize you, but to encourage you. Investing for the long term isn’t about finding the perfect thesis for the moment and the perfect moment to trade on it. That is traders’ stuff. Long-term investing is very much more about the simple, timeless questions: Are we in a bull market or a bear market? Are stocks likelier to be up or down over the next 12 – 18 months? Do people seem broadly too optimistic or pessimistic about the world around them, based on your objective reading of what companies and the economy are doing? You can figure this out with some mental elbow grease (aka basic reasoning skills) and a quick look at flagship economic indicators. No Excel spreadsheets and formulae required. You will also get the benefits of seasonally adjusted indicators that filter out the noise—a bit stumbling block with all the cute real-time stuff.

And when you decide to buy or sell, it makes little difference to longer-term investors that some traders are out there with their high-frequency trades and algorithms. Their goal isn’t to get a better long-term entry point than you, but to make tiny spreads (we are talking pennies here) by getting in and out in a flash. By trading so frequently, they add liquidity to the marketplace, which has helped make trading cheaper and easier for the rest of us. They give the masses tiny bid-ask spreads and confidence that the price you see on your computer screen is the price you will get.

Which is really the coolest thing, to me. Technology may be negatively affecting some sports (again, in my view!). But it is making investing better, for big and small investors. Trades used to take five business days to settle. Next week, thanks to technology, they will take one day. Paperwork and physical stock certificates are of the past.^[iii] Technological advancements also played a giant role in the journey toward zero-commission trades. And it lets retail investors who manage their own accounts bypass brokers who want to pitch products, and instead enter their buys and sells on their own. Freedom is a beautiful thing.