Investing lessons from the Boston (Red Sox) Massacre of '06

Posted by: Aaron Pressman on August 22, 2006


yankee_sweep_copy.jpg

I was more than a little bleary-eyed yesterday at work after spending some six hours at Fenway Park on Sunday night and Monday morning watching game four of the five game Yankees sweep of the Red Sox in what’s becoming known around these parts as the Boston Massacre II (Credit for the above photo goes to the Boston Dirt Dogs site). Version I was in 1978 - don’t ask. To the many depressed Red Sox fans in need of some silver lining, and to take the minds of Yankee fans off their gloating, here are five investment lessons from the Boston Massacre 2006 edition.

1. Look for holes in your portfolio and fill them before it’s too late.
Among the best Yankee batters are lefties Jason Giambi, Robinson Cano, Bobby Abreu and Johnny Damon plus switch hitter Jorge Posada who is better against right-handed pitchers. Obviously if you’re the Red Sox and you play the Yanks 19 times a year, you need some good leftie pitchers, especially in the bullpen. Sadly for the Old Towne team, they had none and the bullpen was crushed repeatedly.
You can take the same approach when you review your portfolio for holes. An income-oriented investor depending mostly on fixed-rate bonds is vulnerable to inflation and should probably mix in some TIPS and maybe dividend-paying stocks and REITs. A stock investor heavy on retailers, energy and tech is vulnerable to a consumer spending slowdown and should probably look at boosting exposure to health care, consumer durables and so on.

2. Nothing lasts forever and sometimes a favorite stocks has to go.
For the past couple of years, Sox fans have been able to relax when middle reliever Mike Timlin entered a game. As set-up man first for closer Keith Foulke and this year for rookie closer Jonathan Papelbon, Timlin was a reliable if aging pitcher to get through the eighth inning of a close game. But no more. Timlin (who is one month older than me) has been positively awful since coming back from the disabled list in June. But with a slim 2-run lead on Sunday night (or was it already Monday?) in the eighth, and closer Papelbon well rested, manager Terry Francona still brought in Timlin. The result? Timlin faced two men, both got on, and one scored. Papelbon came in too late. Oy.
There’s the same tendency to become emotionally attached to once great stocks. How many investors have held onto multi-year losers like Kodak (EK) or Clear Channel (CCU) hoping for the turn-around that’s just around the corner? Academics have found that individual investors tend to sell their winners too soon and hold their losers too long. It may be time to review your portfolio with an unemotional eye.

3. Don't go for every investment pitch that comes your way.
It's been the Yankees strategy for some years now to wear down top starting pitchers with great plate discipline. Starters get worn out by throwing so many pitches and either get tired or are replaced by less-intimidating relievers. Some of Derek Jeter and Bobby Abreu's at-bats in Sunday's game seemed to last forever.
Similarly, with the plethora of stock screens and stock picks and stock lists published every day, you have to be selective to stay out of trouble. It's fine to use such lists for generating possible investment ideas but do your homework.

4. Keep your expectations in check to avoid risky or foolish moves.
The Red Sox entered the series with their opening day catcher and right fielder out because of injuries along with two of the five original starting pitchers. The opening day closer was long out of his job and returning from injuries and two of the highest paid bullpen additions for the year had become expensive flops. Thanks to a weak schedule and some great rookie contributions, they did well but glaring weaknesses were already obvious well before the Yanks came to town, i.e. being swept by the Kansas City Royals. In that light, it's no surprise that the team held onto its young talent at the trading deadline. This wasn't a group that was just one or two players away from a championship.
During the 1990s, some investors got used to double-digit annual stock market returns. In an earlier decade, investors got used to double-digit bond yields. But markets changed and those who kept chasing the hottest stocks or highest yields eventually got burned. Over long periods of time, even the best fund managers beat the market by only a few percentage points a year.


5. Stick with the percentages even when it's not popular
Joe Torre probably won't win manager of the year but he's worthy of consideration. In the bottom of the ninth inning of Sunday's game, with the score tied, David Ortiz hit a lead-off double and Torre called for an intentional walk for Manny Ramirez. The move paid off when the Yanks were able to get Ortiz out on a force play at third. Then after a passed ball turned first and second into second and third, he called for another intentional pass to Mike Lowell amid a crescendo of boos. The next two batters were easy outs and the Yanks won in the 10th inning.
Investors get buffeted with the wisdom of crowds as well and it can pay off to ignore the hordes and stick with a smart strategy. One of the most obvious examples, of course, was the Internet bubble. Those who stayed diversified took a much smaller hit than those who went for the home run of an all-bubble portfolio. Some academics call diversification the only free lunch in economics because it works.

Reader Comments

Roger Nusbaum

August 22, 2006 12:27 PM

Great post!

Of course 28 years is not enough time to never see or read about Bucky Dent again?

jay

August 22, 2006 2:53 PM

win now, fiscal responsibility and developing future talent is a mix that doesn't always win. theo still has a lot to learn.

Ian

August 22, 2006 3:43 PM

Some good points, and some of the lessons learned from the investing world can be applied to managing a baseball team.
One lesson that comes to mind is the internet bubble from 1997-2001. Remember Pets.com? WorldComm? Level 3? Timed correctly, investing in these stocks yielded tremendous short term gains. If held over the long term, they resulted in financial ruin.
Johnny Damon killed us this series, and having Pedro and acquiring a lefty at the trade deadline would have helped us this year. However, Theo decided to think long term, by not signing superstars in their twilights to long term deals, and not to trade the teams future to help it in the short term.
So, take a look at Theo's portfolio in 2008 and 2009, and then see how its doing.

Robert

August 22, 2006 3:44 PM

Other Points:

Good management of your funds are extremely important. Be wary of manager turnover and uncertainty. Look at the effect of last offseason to see the impact of "who's in charge".

Research, research, research!! Look at the intangibles and go beyond the numbers. With the Sox, look at their deals for people like Clement and Renteria who didn't have the moxie to play in Boston. Beckett is looking eerily similar. Do the same for your investment decisions.

Don't bet on unproven entities for your future. For the Sox it was investing their future in unproven bullpen help. Same for investing. Youth is great but inexperience kills.

Do what you do well and stick with it. In the Sox case it's Crisp swinging the bat like Willie Mays Hays in Major League trying to be a home run hitter when swinging big produces outs!

tim

August 22, 2006 6:42 PM

investing lesson, pt. II:

new york yankees 2006 payroll: $194,663,079
boston red sox 2006 payroll: $120,099,824

important difference: $74,563,255

Aaron Lebert

August 22, 2006 7:28 PM

I for one have not given up my stock in the Redsocx this year. I may be the one who goes with his heart, but at least I can sleep at night. Most of you investers probably dumped the Sox in 2004 3 games down. I made heavy gains that year.

Kevin

August 22, 2006 11:22 PM

Prior to 2004, I might have felt decidedly worse than I do now about this 5 game sweep. I believe that most Yankee fans would tell you that the pain and anguish of losing 4 staight ALCS playoff games and watching the Red Sox and their fans (including my son and me) celebrate an American League Championship in Yankee Stadium, easily outweighs any satisfaction gained from this 5 game sweep at Fenway.

sam

August 23, 2006 1:47 PM

Take a look at this graph:
http://www.hardballtimes.com/main/teams/aleast/
This indicates that he who sells his stock in the Red Sox with 25% of the season left to go is performing short term technical analysis. The fundamental analysis above is fine but there are too many intangibles in baseball to make it the basis even for selling the Sox short this season. I am still hoping for the equivalent of an Enron type meltdown at corporate headquarters in NYC!

Andrew

May 3, 2007 12:21 PM

Ummm, how may championships in the passed 80 years do the Red Sox have? that's all that matters. obviously not to s R sox fan, because they don't have mnay championships 1 I think in the passed 80 years. So I guess, these numbers are important to those R sox fans. ....

Matt

August 25, 2007 3:17 AM

OBVIOUSLY, that comment by Andrew was a sad red sox fan attempt to "proove" Yankee fans don't know what they're talking about. Whoever posted this blog is a red sox fan who knows what he talking about, and even HE knows to admit that Yankees are better, so lets all get over it and live happy lives...

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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