Cardboard Gods and Mutual Fund Managers
Along with playing Strat-O-Matic, I collected baseball cards, most heavily through the 1980s. Collecting had become fairly serious business by then. The days of putting cards in the spokes of your bicycle to make it sound like a more powerful machine had passed.
We sorted our cards identifying the commons (90% of ball players), the semi-stars, the “rated rookie” prospects and the hall of fame caliber players. Speculative hopes for rookies to eventually turn into hall of famers meant you horded any cards of young prospects who looked like they could be stars. But for every Ken Griffey Jr. (1989 Upper Deck rookie card), there was a Gregg Jefferies (who had a nice career but never reached the hype of his two-time minor league player of the year pedigree).
Once in a while, players moved up in status rapidly and then crashed back toward common territory … Mark Fidrych, Joe Charboneau, et al. Others just keep plugging away with longevity turning good but not consistently exceptional year-to-year numbers into a powerful collection of career numbers (e.g. Don Sutton, Paul Molitor).
This same phenomenon happens with mutual fund managers. Some make a career out of a few good ideas that made a lot of money and they survive off of that “career year.” They attract more and more money to invest under greater pressure. The investment landscape changes. It rarely works out where they demonstrate persistent performance that beats their peers or passive benchmarks year after year.
Therefore 90% of mutual fund managers are equivalent to the baseball card commons*. Increasingly, very few are truly worth the extra money you pay them to try to outperform the basic average returns the broad market provides. But there are some, with a well-conceived investment process, that may not always be in favor with markets but more often than not, build wealth for their investors.
*As it turns out, the collection of baseball cards – while key in learning the game and the players – is not a good investment strategy. Vintage cards (pre-1980) that are in mint condition still have some value, although it is far below the peak. But in the 1980s, the number of baseball card manufacturers multiplied and they began to turn out immense production runs, such that the market is flooded with cards. Aside from some rookie cards for Hall of Fame players, most of the cards produced over the past few decades carry almost no value. I recently thinned out my card collection and took 600 cards of MVPs, Cy Young Award winners, multiple-time All-Stars and Hall of Fame players to my local card shop. They were all from 1982-1992. I understand the economics. They need to offer much less than they sell cards for in order to stay in business, let alone make any profit. I was hopeful that I could get 10 cents per card on average, knowing that many of the cards list in price guides and on eBay for many times that. They offered me $6 – .01 cent per card. The protective sleeves that they were in cost more than that. Effectively, the cards were worth nothing.
I got some entertainment value out of them and following the game and the players eventually led to me becoming a writer, which took me to the World Series and All-Star Games. I’ve been in the clubhouse at Yankee Stadium when the sprayed champagne is soaking the room. I’ve interviewed Hall of Famers. Even if only a couple hundred cards that I own have any real value, all those quarters I paid for a pack of cards were worthwhile. Along the way my focus changed and I crossed the bridge to personal financial planning, adapting my skills and interest to fit a changing situation.
Takeaway: Truly good mutual fund managers are as rare as valuable baseball cards.
Investing and baseball (Part 1) – What do they have in common?
Investing and baseball (Part 2) – Tony Gwynn and Understanding Probability
Investing and baseball (Part 3) – Statistical Analysis
Investing and baseball (Part 4) – Team building and investment portfolio
Investing and baseball (Part 5) – An insider’s perspective on the game
Investing and baseball (Part 6) – Ongoing re-evaluation and adaptation
Investing and baseball (Part 7) – Keeping scores can be a matter of perspective
Investing and baseball (Part 8) – The rarity of most valuable “players”
Investing and baseball (Part 9) – Fantasy baseball (growth vs value)