I have a friend who has worked at a small hedge fund for the better part of a decade. To his persistent frustration, the fund has remained small. It’s remained small because, despite what appear on the surface to be good returns, the fund has been unable to attract virtually any outside money.
It’s a quandary for my friend. The fund’s portfolio manager, (the sole owner of the fund’s management company) has just enough wealthy family and friends who have invested in the fund to sustain the operation. Plus, the fund is located, to quote Bruce Springsteen, “down San Diego way” so my friend has a pretty enviable life style. Nonetheless, he’s ambitious and therefore frustrated because the problem with attracting assets is attributable to one thing: His boss doesn’t understand game theory.
Whether anyone wants to admit the dirty little secret or not, running other people’s money is a game and, like any game, if you want to win you have to know the rules and just as importantly you have to understand the nuances involved in playing the game. There are rules to attracting money, there are rules to managing the money, and there are rules to retaining the money – and all of them are unwritten.
Successful portfolio managers understand that the future value of their fund is often more dependent on their ability to market the fund as opposed to generate returns. Of course, no amount of marketing should be able to disguise sub-standard money management skills, but on the other hand the portfolio manager must understand the difference between absolute returns and marketable returns. What may be impressive in the context of the former, is in no way guaranteed to qualify as the latter. It may be frustrating, but that’s the game of managing other people’s money for a living.
My friend, a bridge aficionado and accomplished poker player knows this inherently, but has had no success at all in imparting this knowledge to his boss. He’s tried everything from card game analogies to explaining the meaning of phrases such as “playing with a lead,” “you can’t win the game in the first quarter, but you sure can lose it there,” “take double bogey out of the equation” and “put your driver away” -- phrases which are easily recognized by any sports fan. Nothing works however, as his boss continues to generate wildly fluctuating returns, albeit generally positive over time, that impress his unsophisticated relatives but have little chance of attracting outside investors. My friend eventually came to the conclusion that his boss couldn’t grasp the nuances because he doesn’t follow sports, and not only did he never participate in sports as a kid, he didn’t even play table games growing up. (The PM has multiple science-related degrees.)
He summed it up to me this way: “It’s useless. Some people just don’t understand game theory. If you don’t learn it at a young age, it can’t be taught.”
If that’s the case, it’s a pretty good bet not many of the managers in the playoffs this year owned the game of Risk or a Monopoly board growing up.*
* I started to type “chess board” but it was just too absurd to think of Joe Girardi contemplating chess strategy.
I could probably write 6,000 words on this topic, limiting myself just to the games played in the last six days, but let’s just take a look at a few instances in the last two days.
Game 4, New York at Detroit
In the bottom of the first inning, having retired the Yankees in order in the top half of the first, the Tigers lead-off hitter Austin Jackson walked, bringing to the plate Ramon Santiago. It’s important to note that this game featured a pitching match-up of Rick Porcello and A.J. Burnett, two pitchers who sported ERA’s for the 2011 season of 4.75 and 5.16 respectively. Prior to the game, Yankee fans were as nervous as the members of a bride’s family are when the still-single, hard-drinking, vaguely-employed Best Man stands up, unsteadily, to give a wedding day toast.* Tiger fans weren’t exactly confident either, but honestly when this series began if you would have told them “you’ll have a chance to end this series at home against A.J. Burnett” they would have kissed you.
* Those weddings are fun.
So with all 27 outs left in the game, Tiger manager Jim Leyland ordered Santiago to bunt. As if he’s trying to win a 1-0 game, Leyland spent an out with the hope of advancing a runner one base. He spent a scarce resource on something that promises to be plentiful. Not to put too fine a point on it but that’s like bringing sushi to Japan, a call girl to Las Vegas, or sand to the beach. It’s an insanely stupid thing to do. Further, it’s evidence that you have no recognition of the playing environment you’re in. You have Rick Porcello on the mound against the second highest run scoring offense in baseball and you have a very potent offense of your own against A.J. Burnett and you’re playing for one run?
Let’s turn this over to the Yankee fans. How many of you want the opposing team to give you one free out with A.J. Burnett on the mound, every time a runner gets on first? I have a feeling there are more “hands in the air” than at a 1995 Notorious B.I.G. concert.
So what happened? Santiago popped the bunt up, resulting in a free out with nothing gained. At the end of the inning the Tigers had three walks, a smashed out to deep center and no runs to show for it because they’d given away a precious out. Gregg Easterbrook, author of ESPN.com’s Tuesday Morning Quarterback column, has a bit where he writes “Game Over” in his notebook whenever a trailing team punts while in their opponent’s territory. When Jim Leyland announced that his strategy for winning a game in which Rick Porcello was pitching against A.J. Burnett was to try to win 1-0, it may as well have been “game over” for Tiger fans.
Game 3, Philadelphia at St. Louis
By the end of this game, it certainly appeared that Charlie Manuel was managing the Mensa ring off of reputed genius Tony LaRussa. (That would change one day later. See below.) A couple of issues ago, I squarely laid the blame for the Cardinal’s Game 1 loss on LaRussa and after Game 3, I believe the Cardinals might have swept the Phillies if not for LaRussa’s questionable decision making.
In the top of the 7th inning of a scoreless game, Shane Victorino led off with a single. Two outs later, Victorino had moved to second base on a groundout, bringing to the plate 8th hitter Carlos Ruiz. With first base open, LaRussa decided to walk Ruiz. In the National League, this tactic of putting even more go-ahead runs on the bases is not an uncommon occurrence early in a game, because of course, pitchers hit 9th. In this case though there was no way Phillies pitcher Cole Hamels was going to hit. In tossing six shutout innings, he had already thrown a whopping 117 pitches. There was an excellent chance he was done pitching for the day anyway; the Phillies had a pair of relievers throwing in the bullpen. The Phillies were 100% sure to pinch-hit which means LaRussa substituted facing Carlos Ruiz, the Phillies 8th hitter, with anyone the Phillies chose from their bench. Up came Ben Francisco who promptly deposited a Jaime Garcia pitch in the left field seats for a 3-run homer. It was the second 3-run homer in three days that I’d pin on LaRussa even though Garcia threw the pitch.
Here’s the thing: Garcia should have never been in the game to throw it. Faced with exactly the same decision as Charlie Manuel, LaRussa botched it at the bottom of the sixth inning when he let Garcia hit in a scoreless game with two outs and runners on first and second. Watching the game, I was thinking that if Matt Holliday were available to pinch-hit you had to bring him in there. Plating 1,2, or 3 runs with nine outs to go and a late-inning bullpen that had shut down the Phillies one game before, is a huge leverage situation but LaRussa squandered it letting Garcia, and his lifetime batting average of .100 against left handed pitchers, walk to the plate. Garcia quickly struck out and about fifteen minutes later the Cardinals were in a deep hole. (To make matters worse, Holliday later pinch-hit in a much less important situation.)
Game 4, Philadelphia at St. Louis
Just as I was about to remind everyone that behind the Southern twang, the butchered English, and the bumbling persona of one born in a car -- in West Virginia, no less -- (that sentence is entirely fact-based) lies the very astute mind of a baseball manager, Charlie Manuel made a Leyland-like goof of his own. One win away from clinching a spot in the National League Championship Series, the Phillies got hits from their first three hitters, plating two runs in the process. Then with Ryan Howard facing a right-handed pitcher, Hunter Pence tried to steal second base. That’s an indefensible decision. Cardinal catcher Yadier Molina has three times led the league in percentage of base stealers thrown out, Hunter Pence for his career has been a value-destroying proposition as a base stealer and you’ve got Ryan Howard batting against a right handed pitcher. (As discussed in Issue 4, that’s like having a perennial MVP at the plate.) Pence got thrown out and the Phillies best chance for breaking the game open early vanished. Never mind that Pence was actually safe at second as the umpire blew the call on a bang-bang play. It’s an indefensible position when you’re facing a pitcher who hasn’t gotten an out yet and is already down 2-0. Charlie Manual forgot he was facing the top scoring team in the National League, in their own ballpark no less. He should have remembered a 4-0 lead wasn’t safe against the Cardinals with Cliff Lee on the mound in Philadelphia, and therefore let a bigger inning possibly develop.
Watching some of the decisions managers are making, I’m convinced part of the interview process for the job should involve playing a game of Monopoly with the team owners. If the managerial candidate doesn’t understand the different value,as opposed to cost, of each color properties, he’s eliminated from consideration. (Don’t you just know Joe Girardi would think the most expensive properties, Boardwalk and Park Place, were the most valuable?) Then maybe we’d get some better in-game decision making.