Disciplined Systematic Global Macro Views

Disciplined Systematic Global Macro Views

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As the baseball season begins to go into full golf swing, I begin to think about stats and who is playing up to their potential. Are opportunities to find undervalued players there? One of the better illustrations of market inefficiency and the competitive responses of markets is found in Michael Lewis’s book MoneyBall: The Art of Winning an Unfair Game. The premise in Moneyball was that on-base percentage, a statistical way of measuring a batter’s value, was undervalued in the major leagues.

There was inefficiency in the labor market. This inefficiency was effectively exploited by the Oakland Athletics as a way of leveling the performing field for poor market groups which didn’t have the money to buy top talent. They were able to successfully form winning teams based on steps that others did not use. The take-away for traders is straight-forward.

You should look for hidden value through using choice methods of evaluation. Unfortunately, when you find this concealed value your success may cause others to emulate your behavior. Marketplaces are dynamic yet others will enter the market to exploit these same opportunities as well. These activities led to market efficiency. There is no free lunch, that can be exploited continuously.

Using an extremely general definition, market efficiency is the power of prices to respond to changes in the fundamental value of a market quickly. It is the result of a perfectly competitive market. Once this anomaly or chance to exploit up hidden value is used, you have to look at a new strategy that can create value.

If you don’t have confidence in the efficiency of markets like baseball, read John Ray and Hakes Sauer in their summer 2006 Journal of Economic Perspectives paper, “An Economic Evaluation of the MoneyBall Hypothesis”. They found that the market inefficiency talked about in the reserve, on-base percentage, vanished within a yr of its publication. Teams found this to be always a successful way of measuring a player’s worth, so they bid up the salaries of these who had a high on-base percentage relative to the home run hitting. The labor market became effective or eliminated what was perceived to be cheap value. The next time you visit a baseball game, think about the hidden value and how it could be revealed and eliminated fast. Could the same thing happen with the alpha of many investment strategies?

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