The truth is the people who run ball clubs are a lot like the people who run investment portfolios. They always think in terms of buying the big names in order to put together a winning team. And as you can see, this often leads to failure. We believe this is due to the failure of active stock selection and an imperfect understanding of where alpha comes from.

Billy Beane knew this. The Oakland A’s were struggling but their scouts were using traditional, outdated and ineffective methods to identify talent; it was the only way they knew how to evaluate talent. With a tiny payroll and a burning desire to win, he knew he needed to approach the problem differently. He decided to focus strictly on the data. Rather than attempting to predict the future of a player or buying superstars, he took human judgment out of the equation. Specifically, he focused on a player’s On-base Percentage. The result was revolutionary and the randomness of outcomes was reduced.

In investing, just like in baseball, we believe it’s all about getting things down to a number. Once you have that, you can reduce the vague and ambiguous information—you can avoid investment strikeouts and find value in stocks that many fail to see. The Oakland A’s exploited the On-base Percentage. At New Age Alpha we exploit The Human Factor.

The Human Factor measures the probability a company will fail to deliver the growth implied by the stock price. It’s New Age Alpha’s proprietary methodology designed to systematically measure the amount of vague and ambiguous information impounded into a stock’s price. By putting a number to this risk of human behavior—the Human-Factor—we believe we can measure it and avoid it. In this way, we believe we can produce a differentiated source of outperformance in any investment universe.

Just like baseball’s outdated scouting methods, active stock pickers have always attempted to guess market winners by forecasting the future. Such an approach is archaic, unsystematic, and unpredictable. We believe human behavior is the source from which all traditional risk metrics are born. Beta or PE Ratio do little; they are merely proxies for certain types of risk. If an investor hopes to avoid risk en totale, he or she must look at risk in an entirely new way. Put simply, rather than trying to pick winners, investors should aim to avoid those stocks most likely to disappoint.

Note: Some may contend that there is a generalized successful trend among the top 10 or so teams. As an average, this is true: the top third teams by payroll averaged a W-L percentage of 52.5%, the middle averaged 49.8% and the bottom averaged 47.8%. But this general trend had little predictive power on the best teams overall. The Braves, with the most wins (104), ranked just above the middle with the 11th highest payroll. Meanwhile, the Mets had the highest payroll, but had a losing record. And an amusing sidenote? The eventual World Series winner, the Rangers, had the seventh highest payroll.