Supported by Greenhaven Road Capital, finding value off the beaten path.
“Something was bothering me about the Tampa Bay Rays, the winners of the division in 2010,” wrote Joe Peta, and his journey from Wall Street to the warning track began with a That’s Interesting moment.
Peta, a former sell side market maker at Lehman walked off the curb and got hit by a bus, literally. Temporarily disabled, fired, and stranded away from his family, Peta found himself drawn back into baseball. His book Trading Bases tells the story.
Peta had always been a baseball fan, but in 2010 thanks to advances in statistics and (unwelcome) time on his hands, he slid back in. Looking around, seeing the results for the Rays, he realized that there were secrets here.
- Morgan Housel points out long-term vs expiring knowledge.
- Economist Chris Blattman spoke about cumulative vs messy data.
- Nate Silver gave us the signal and the noise.
- Peter Thiel calls the good stuff ‘secrets’.
Whatever metaphor, the outcome is the same. If you can see the red house, you’ve got an edge.
Peta got his edge by building models. These were thanks to ‘standing on the shoulders of giants’, and Peta thanks them in the book. Constructing a model is like building a snowman. Gather as much raw material as you can and start to put it together based on what you know. “Resources plus skill,” wrote Peta, give you an advantage.
But a pile of snow isn’t a snowman and data isn’t a model. Peta tinkered. One recurring mistake was small sample sizes. “In general, anomalies are more likely to show up in small samples,” wrote David Levitin.
Peta found “cluster luck.” If a team had especially good results with runners on base, they had cluster luck. He knew it was luck because the results didn’t repeat. He created his own two-jar model.
It turns out that some things in baseball are skill based and some rely more on luck. Hitting home runs is more skill. Hitting doubles is more luck. Starting pitching is more skill. Relief pitching more luck and is so variable that the most accurate predictor is to assume the league mean for every team.
Starting with the base rate of the previous season’s results and making adjustments because of luck (clustering, relief pitching), Peta had a model. Now it was time to head to Las Vegas.
Once Peta started, there were five things he kept in mind. Summed up in one quote it was this:
“It’s very difficult for most people, even many professional traders, to invest in an outcome they don’t think is going to happen. It’s impossible to be an options trader with this mindset.”
- Win money, not hands. The aim wasn’t to be right most often, it was to make money on his bets.
Don’t implode. No single bet should imperil the capital. Peta saw Lehman Brothers failed and fell because they floundered here.
Check the engine, do routine maintenance. Each month he checked the model to see what worked and what didn’t. He didn’t want to become the ball player who attributed to skill what was actually luck. As the season went along he increased the reliance on current stats and decreased the emphasis on starting ones.
Don’t get behind. There is a psychological burden – in betting baseball futures and making trades – when you get behind and have to make up a difference. Peta quotes Warren Buffett in the book, but not this line, “Rule number one, don’t lose money. Rule number two, don’t forget rule number one.”
Don’t forget life. Peta compares life’s ‘tops’ to market tops. No one rings the bell at the top of the market (one of the Buffett quotes) and no one does it for your life. You don’t get an alert on your phone that this is the last time you read a book to your kids. Remember that too.
Rather than my review, here’s the blurb from Tyler Cowen on the back of the book:
“Joe Peta has a wonderful story to tell and precious insights into the evaluation of talent, investments, and risk. This is a great book for anyone with capital to allocate. But if you love baseball half as much as Peta does, you will find Trading Bases absolutely irresistible.”
Thanks for reading, I’m @mikedariano.
*Actually he got hit by an ambulance.