Sunday, June 18, 2006

Active Management and Fantasy Baseball

I'm very much a fan of indexing and try to read as much as possible by people like John Bogle (Vanguard) and Jonathan Clements (WSJ) who are strong advocates of indexing and passive investing. One of the benefits of passive investing is decreasing transaction costs and minimizing taxes which necessarily should result in higher returns...

How does this relate to fantasy baseball?

At work, I joined a group of co-workers for a friendly game of fantasy baseball this season as provided by Yahoo. Just like stocks, we can add new players to our teams or drop players from our team if you don't think they are putting up the numbers (i.e. performing well in your "portfolio"). Of the people in the league, one guy is actually serving in Iraq so I presume has limited access to information (looking at box-scores, stats, etc) and limited access to the internet. He is the quintessential passive player b/c he hardly makes any moves/transactions in changing his lineup.

The rest of us... depending on how serious the competitor is, spend quite a bit of time "researching" players and re-evaluating our lineups. As part of the game, the league keeps track of how many "transactions" or moves each has made. Unlike my approach to investing, for some reason, I execute a number of transactions for fantasy baseball (29 moves so far this season). I was in first place for the first 6 weeks of the season and of course, trash-talking; however, lately, I have lost the lead to the current first place leader..... notably, the guy serving in Iraq.

He has a total of 8 transactions all season. So while I'm constantly tinkering with my lineup and trying to find "hot" players, the guy that is not adjusting his lineup frequently has eventually overcome all other players and is now in first place.

I finally realized that similar to many investors, I have been chasing performance in my fantasy league team and this eventually caught up to me in costing me the lead. And across all yahoo sports fantasy players, people often do the same thing... namely, chase performance. I noticed this b/c yahoo provides statistics of the most added or dropped player over the previous week and players that are added are often those that have recently caught fire and are putting up big offensive numbers. Similarly, investors have poured billions of dollars into emerging markets and international funds in 2005/6 even though the bulk of gains in these sectors were made in years prior.

So who will be the next hot hitter for the month of July in Major League Baseball? Might as well throw darts as nobody can truly predict this... not even Peter Gammons, Stuart Scott, or Joe Torre.
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