My last post introduced the concept of Moneyball investing, a catchy (I hope) term I borrow from Michael Lewis to describe an approach to investing that stands between Indexers who restrict decisions and subjective Active investors. Analogous to what’s done in baseball, Moneyball investing means making on the basis of factors, rules, evidence, etc. Now, let’s see what, it can bring to the table in terms of return and risk.

My Favorite Guru Quote

Peter Lynch opened Chapter 9 of his classic “One Up on Wall Street” as follows:

“If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train— and succumbing to the social pressure, often buys.

“Hot stocks can go up fast, usually out of sight of any of the known landmarks of value, but since there’s nothing but hope and thin air to support them, they fall just as quickly. If you aren’t clever at selling hot stocks (and the fact that you’ve bought them is a clue that you won’t be), you’ll soon see your profits turn into losses, because when the price falls, it’s not going to fall slowly, nor is it likely to stop at the level where you jumped on.”

I’ve lost count of how many times I quoted this, and I’ll probably keep doing so because this may be the single most-important piece of wisdom any guru has or can pass on to anyone.

The first edition of that book was published in 1989 and Lynch was sharing the benefits of experience he gained during prior years. Since them we’ve had our information revolution. Even the greenest rookie can get vital information as quickly as the most hardened pro, and so, too can everybody in the media who talks and writes about stocks.

So have we entered into an investment version of the Enlightenment? Can we confine Lynch’s warning to the Dark- and Middle-Ages of Wall Street?

So it’s really not about information. Everybody has that. Moneyball is about the benefits of disciplined systematized use of the information.

Testing the Waters

It’s hard to precisely test this since we still lack simple reliable measures of the sort of crowd appeal to which Lynch referred. But perhaps we can come up with some tolerable proxies. Here are some ideas: