Perspective :

The Wizard of Oz

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Defense and consistency of returns still have a spot in the lineup

As the World Series starts today, my hometown of Atlanta seems to forget that it is a football city for at least a few weeks to back the Braves.  I’ll admit that I did not watch a game all year, yet I will be one to tune in to see if Atlanta can get its first major championship in a long time (other than Atlanta United, which I count, but many don’t).  It’s hard to not get nostalgic watching baseball, as many of us were baseball fans long before finding other sports.  For me, baseball was king in the 80’s and early 90’s before things like juiced baseballs and juiced players crept into the game.  As I think back to some of the players that made an impact on me growing up, I had a strange comparison that popped in my head and just wouldn’t leave. Frontier just may be the Ozzie Smith of investing.

For those that are too young to remember, “The Wizard of Oz” as he was called, is widely regarded as the best defensive shortstop in the history of baseball. Possibly the best defensive player the game has ever seen.  15 all-star games, 13 gold gloves – the guy could do it all.  For 19 years, Ozzie was as consistent as they come at a time when people truly appreciated the fundamentals of the game.  A career .262 hitter, Smith never hit more than 6 home runs in a season and finished with nearly 2500 hits, but only 28 home runs. Smith was appreciated for what he was and what he brought to the game. He was used mostly as a number two hitter in the lineup, where consistency over power is most appreciated and he struck out only 6% of the time at bat. Despite his success, when Smith signed a league-high contract in 1988 for roughly $2 million per season, it was one of the most debated contracts in baseball. Batting average and home runs were the stats that jumped off the page and Smith’s stats were not impressive in either category.  It wasn’t until the early 2000’s (thank you Billy Beane) that advanced stats would uncover much better ways of analyzing a player’s value to the team.

After the 1996 season when Smith retired, the game started to change dramatically and we wouldn’t find out the cause until much later.  Steroids caused all of the offensive stats to balloon to levels never seen before.  The home run record of 61 in a year held by Roger Maris for almost 40 years was bested six times in a four-year stretch from 1998 to 2001. Who needed defense or consistency any more in an era where Nike emphasized it best: “chicks dig the long ball”.  Sammy Sosa, who beat Maris’ record 3 times in four years was one of the most popular players in baseball despite striking out 37% of the time at bat in those four years.  The contracts escalated as quickly as the offensive stats as baseball’s top paid players (all home run hitters) bested $5 million by 1992, and $10 million by 1997 and $20 million by 2001. By 2003, the news of steroids rocked the league and the amazing stats starting coming back down to Earth.  No hitter has hit 60 home runs since 2001.

Back to the investment world where Frontier has for nearly 22 years attempted to provide risk-managed strategies that focus on defense first and consistent returns second.  Our philosophy of Downside First Focus is designed around one-year loss targets. This approach matches the investment philosophy of many retirees or pre-retirees who value singles and doubles over swinging for the fences.  When we surveyed advisors last year to describe their philosophy with clients, 76% of advisors said that risk management with reasonable returns was more important than beating the market or getting the cheapest investment options.3  But as we approach year 12 of this unusual bull market, it can be difficult for people to find the appreciation for defense when markets appear to never go down, or quickly rally when they do.  Maybe one day we will look back at this period as the steroid era of investing.  Low interest rates and a decade of never-before-seen stimulus have “juiced” returns and markets have quickly recovered without even the hint of an extended downturn. The fastest 10%, 20%, and 30% market downturns in history happened in Q1 20202, but rallied so quickly that they now appear as just a blip on the radar.

As I watch baseball again this post-season, I am once again surprised that every hitter, despite the situation, seems to be swinging for the fences.  Just once I’d like to see someone get a single. Steal second.  Bunt over to third and a sacrifice fly to win a 1-0 game. A philosophy that best mirrors Frontier’s approach.  Maybe I’m just getting old, but somewhere I’m guessing Ozzie Smith is thinking the same thing.

Quick Takeaways:

  1. Defense and consistency of returns still have a spot in a lineup but don’t expect those returns to match your cleanup hitter.
  2. Don’t just look at batting average and home run stats.  Advanced analytics may tell a bigger story when comparing investment managers.
  3. 76% of advisors are looking for risk management with reasonable returns. Perhaps, if we were Nike, we’d say “Investors don’t dig the long ball.”


2 S&P 500 Index

3 Frontier Asset Management “2021 Challenges and Opportunities for Clients” Questionnaire. January 15, 2021

The S&P 500 Index represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ.

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