So, by now you are reading this book and thinking “If my current investments carry far greater risk (and less individual meaning) because they are correlated, then how do I actually invest in 0 correlation markets?”
Well, for one thing, and I preach this ALL THE TIME, you have to throw conventional thinking out the window. I mention this over and over in this book and when I speak because I truly believe it’s the only path to real success. I believe that mimicking what others are doing will lead you to mediocre returns in investments and in life.
So how can you be different? You need to ask the question: “What can I trade that has absolutely no relationship to the economy, global markets, politics, real estate or currency fluctuations?”
Take it one step further and ask yourself what it is you are actually doing to determine your stock, bond and other investments.
Is Warren Buffet your uncle? Is Donald Trump your in-law? Do you have access to information that no one else on earth has that can help you make your decisions?
When you trade stocks or futures you tend to fall into one of two categories (or a combination of the two) in terms of the analysis that forms your trade decisions…fundamental or technical.
In futures, for example, a fundamental trader is looking at impacts on supply and demand while a technical trader is simply looking at historical price action to determine future price movements with no real regard for the underlying asset. ScoreMetrics approaches sports the exact same way.
In the new age of sports investing we can look to an Oscar-nominated movie for a good indication of how it has evolved in recent years.
Moneyball is the story of the underfunded Oakland A’s Major League Baseball team and how they overcame all odds to compete with the big-spending New York Yankees by applying a method of picking and starting players. The system was originally developed by a man named Bill James. At the time, the logic was considered laughable and discounted by almost every “expert.”
Before James and his theories, the best players were considered the ones that had the best builds, could run the fastest, hit the ball the furthest and had the highest profile, but he saw it differently. He saw each player as a number and that number was either worth a point or not. He looked to see if a player could turn himself into a runner on base and if that player was indeed able to get on base, he had an opportunity to score.
This revolutionized the way General Managers built teams and the way managers coached them. James named his system Sabermetrics in reference to the Society for American Baseball Research (SABR).
The story told in the movie Moneyball, while embellished for theatrical release, was true. The A’s took a payroll of $41 million and went the distance with the $125 million payroll of the Yankees in 2002. Now, a team that played in a small market could compete with the big city team for a third of the payroll and do it in a way that no one had seen before. The A’s were thinking outside the box. They made themselves part of the 1% by ignoring the other 99%. This is why I love that quote so much!
Sabermetrics became legendary and in 2006, Time Magazine named James as one of the most influential people in the world in the Time 100. Many teams began to follow the principles of Sabermetrics, and it soon spread to other sports as well.
As a side note, those of you that are members of our ScoreMetrics premium service already know that we borrowed and then modified some of the principals of Sabermetrics for some of our own systems. So, Sabermetrics is truly the father of ScoreMetrics!
There is so much beauty in what James did for a simple reason: he focused on the economics of baseball and how a team could build their roster and then manage the season, not just as a team but as a business.
This method removed the human element from decision making. No longer would scouts and managers decide which players to trade/acquire/start/sit based on their evaluation of the player, but rather purely based on statistical data that measured on-base percentage and runs. They would then divide that performance into the cost of the player to figure out how to get an optimal lineup within a given budget, or for that matter determine if an individual player’s cost was in-line with his statistically derived value.
To some extent the world has evolved in a similar fashion. Programming technology, access to data, and the internet have all combined to change how we predict price action when we invest and plan as an individual or company on future price movements.
Have you ever been on a travel booking website that tells you if the price of the ticket you are looking at is likely to go up or down? This is based on a real-time algorithm that weighs supply and demand against time and trend. Brake-assist on your shiny new car calculates in real-time the distance between you and the vehicle you are approaching, comparative speeds and brake time to determine if and when you need to apply the brakes. The world has changed a lot in 40 years…there was a time when you would carry a shoulder bag to transport your cell phone that was the size of a football. The point is that technology has afforded a new way to approach just about everything, including how to wager on sports.
In the futures industry there are two well known traders by the names of Jake Bernstein and David Hightower that brought widespread attention to a method called seasonality trading.
Seasonality trading is based on the idea that markets are both cyclical and seasonal in nature, especially in commodities which have natural cycles for planting patterns and seasonal tendencies for supply and demand. Berstein and Hightower would take every market and analyze the last 20 years to determine if there were standout times to buy or sell.
For example, you might have discovered that if you buy pork bellies on November 8th and sell on November 22nd to take advantage of the seasonal demand ahead of Thanksgiving, that you would be successful 85% of the time.
Or you might find if you sell treasury bonds 3 days prior to the Fed interest meeting and buy it back just before the announcement, that 18 out of the last 20 years you would have made money.
These are just made-up examples of the types of trades derived from seasonal analysis, but hopefully you get the idea. The markets have so many influences – in pork bellies you have farmers, wholesalers, international production and trade, weather, breeding patterns, etc. – and these influences don’t always care if it is November 8th or November 22nd in causing buying or selling to occur. So the market moves and pattern traders leverage those movements, regardless of the underlying cause.
We can apply the same idea to sports trading, and I call it ‘trading’ because it is no different than buying or selling a stock. Data decides what I do next.
0 correlation investing does exist in sports, and you can apply the same logical approaches you have used in your traditional investments to this newly legalized frontier for traders.