Giants, Statistics and Discovery Communications (DISCK)

“Baseball is 90 percent mental. The other half is physical.” – Yogi Berra

The San Francisco Giants won the World Series a couple of weeks ago in a 7 Game nail biter. This is their third title in just five years, and many now consider them to be the first baseball “dynasty” of the 21st century. There have been a lot of changes to the team over the five years and three World Series wins, and in fact there are only three players to have played on all three teams. Bruce Bochy, the Manager, has been the one constant. And his one constant has been effective, but not blind, reliance on statistics.

Statistics are ingrained in America’s favorite past time. Or, as stated by Robert S. Weider, “Baseball fans are junkies, and their heroin is the statistic”. Baseball counts everything from to balls to strikes to something called WHIP (walks and hits per innings pitched), and compares every inning from every game to nearly 150 years of history. The Elias Sports Bureau is the quirky group that comes out with obscure records like, “this is the first time a player has struck twice in the same inning of a night game in the last 15 years.”

The stats are fun for fans, but for managers stats are critical to in-game decision making. When John W. Henry (famous Commodities Quant) bought the Boston Red Sox in the beginning of 2002, he immediately hired the most well-known Baseball statistician, Bill James. A year later they tried to hire Billy Beane, the General Manager of the Oakland A’s and pioneer of advanced statistics in Baseball who was made famous by Michael Lewis’ book Moneyball. Do stats really make a difference? The Red Sox and Giants have won 6 of the last 9 World Series.

Baseball managers use statistics to drive or inform decisions in every inning of every game. For those of you that are not baseball “junkies”, here’s an excerpt from a blog by Jayson Stark of ESPN, after their game 2 loss to the Kansas City Royals, to give you a sense for the use of statistics in game management:

“Those are the matchups we were trying to get,” Bochy found himself saying after using five pitchers to try to maneuver through a disastrous, five-run sixth inning. “It just didn’t work out.”

Asked later if he’d been tempted to use one of his left-handed bullpen bullets, Javier Lopez, to face Hosmer, Bochy shook his head. Peavy had just retired 10 straight hitters, so, in the manager’s opinion, “he really was throwing the ball well. So no, I can’t say I was going to make a change there because he gave up a bloop hit.” (even through the pitcher’s opponents in the regular season had a .324/.389/.548 batting average/on-base/slugging line on his third time through the order).

But once Bochy’s bullpen parade began, he couldn’t seem to make it stop. He waved for right-hander Jean Machi to try to induce a double play from Billy Butler. But Machi, who seems to have run out of premium unleaded after a season in which he held right-handed hitters to a .186 average, fell behind Butler 2-0, then served up a go-ahead single. Royals 3, Giants 2, Bochy heading for the mound one more time. But all Bruce Bochy could say was “the kid threw very well [in Game 1 on Tuesday night]” and “I liked my matchups.“

Although the matchups didn’t work in Bochy’s favor in Game 2, baseball managers are always trying to create the best probabilities for every part of every game situation.

What makes Bruce Bochy a future Hall of Fame Manager is not only his ability to use probabilities to put his teams in the best position to succeed, but also his ability to use this information as a baseline and not the end all be all. There are also dozens of fundamental factors that managers need to consider including the flow of the game, the need to preserve certain players for later innings or the next day’s game, injuries, defensive abilities, speed of the player and the players experience amongst others. He’s one of the best ever at bridging the importance of probabilities along with fundamental factors and his considerable experience to make good decisions on a moment’s notice.

Approaches to investing have traditionally been focused on one or the other, pure statistics (Quants) or pure fundamentals. That’s starting to change, and many fundamental investors are benefitting from incorporating statistics and probabilities into their decision making process.

This is a big part of what EidoSearch does, i.e. helping our fundamentally focused clients bridge that gap. Our clients are able to insert a layer of objective statistics in their decision making process when entering new positions, exiting or adjusting existing positions, projecting risk and volatility and getting new ideas customized to their risk profile. With probabilities as a baseline, they are able to apply their experience and other primary factors to enhance the statistics and to improve the profitability of their investment decisions.

EidoSearch has made a weekly market call covering all markets and all time frames for over 13 months now (55 or so projections), and we have a hit rate of about 70%. This is all based on probabilities. We’ve also tested this way more rigorously over 9 years and about 6 million predictions, and our cumulative returns of a simple portfolio strategy are about 450% vs. S&P 500’s 58%. Click here for a copy of our White Paper and research.

This week we’re highlighting probabilities for a large cap Consumer Cyclical, Discovery Communications (DISCK). The stock hit an all-time high of $43 in early September, and has since dropped 26% to $32.32 as of Friday’s close. Q3 earnings were seen as a disappointment based on revenue expectations and forward guidance. What do the stats tell us?

There’s 85% probability the stock will be above $30 in 1 month, and 3.3 times the projected upside to downside. The average return of the actual return distributions of the most similar environments historically (3 month price patterns in Consumer Cyclical stocks) is a one month forward return of 7.4%.

Some additional, underlying statistics below. The stock is up 67.3% of the time, and the winners double up the losers (a little baseball pun).We would love to get Bruce Bochy’s opinion from here. Have a great week!