President & CEO Dan Kraninger reflects on the first quarter of 2018 and provides insight moving forward.
“Something good can come from every defeat and disappointment.”
- Jay Wright, Head Coach, Villanova Men's Basketball
A big disclaimer before you start reading this – I’m a Villanova alumnus. I married a Villanova alumnae and my oldest son is currently a freshman there. So I’m definitely biased. With that out of the way, let me tell you a story of how Villanova basketball relates to what I do every day as an investment manager. At NorthCoast, we use data to build investment models. We then implement these models daily. We believe this quantitative discipline separates us from many other firms that rely on a conventional portfolio manager who makes decisions based on a combination of his/her intuition and intellect.
Why? Because we believe human beings are flawed decision makers over time. Greed, hope, fear, and over-confidence are just some of many elements that creep into the process and disrupt results. The proof is in the pudding - after many years of data, the S&P 500 index routinely outperforms classic buy and hold equity managers. I believe this is largely because the S&P index adheres to a discipline – it doesn’t come into the office upset after an argument with a spouse, have a headache from drinking too much the night before, or make a decision just because a paycheck is on the line. It simply comes to work every day and buys the 500 biggest companies in the U.S. We believe by approaching our investment strategies with the same discipline and more sophistication, we can outperform over time.
Outside of investments, I enjoy reading stories about how the use of data is changing decision making across other industries, the following being one of them...
After a 13-19 season record in 2012, Jay Wright made a conscious decision to recruit guys who could shoot, rather than just score. This decision was based on the research of Wright’s former assistant, Billy Lange (now with the Philadelphia 76ers), who is an analytics expert and loves the mathematics of basketball. Lange produced a blueprint for Villanova to follow that outlined an approach to the 3-point shot (both offensively and defensively) in a 37-page manifesto. This is now the core of the team’s identity and a large reason why the Wildcats have been so successful since its implementation.
Shoot ‘em up and sleep in the streets is what coach Wright calls his offensive game plan, a layman’s term for the more scientific discovery, which boils down to this: offensive success comes not from making a high percentage of 3-pointers, but from the volume of attempts. That sounds simplistic but to make it actually work takes a pretty nervy coach, one that doesn’t mind hearing as many clanks as swishes during a game. With Wright at the helm, Villanova players have the proverbial green light to shoot. The Wildcats ranked seventh (out of 351 programs) in the nation this year in 3-pointers attempted and set a record for 3-pointers attempted and made during their college basketball tournament win this season.
On the flip side, a winning defensive strategy isn’t based on limiting an opponent’s shooting percentage, but on reducing the number of shots it takes. As much as the Wildcats are known for their 3-point offense, the real secret to
the team’s success is the way they defend the arc. Every which way Lange broke down the data proved the same thing -- the more 3’s opponents attempted, the more likely Villanova was to lose the game. Therefore, the defense focused on minimizing the 3-point attempts by the other team, and it’s no surprise the numbers again skewed heavily in Villanova’s favor this season. More impressive, this recipe for success has been in place since 2013 which happens to coincide with another record Villanova set this year – 136 wins over the last four years (the best 4-year mark in NCAA history).
Statistical analysis and commitment to data were critical for Jay Wright and the Villanova Wildcats to build and maintain their success in college hoops. The same is true for NorthCoast. Every stock and ETF in your portfolio conforms in the same manner – they are filtered through a selection process that relies on data and analytics in an attempt to produce more “wins”. Though this discipline can produce “clanks” (not owning many FANG stocks during the last two years as the data said not to), over time this approach has kept our clients in good stead. Those who own those stocks now have a much harder decision on what to do... Sell? Hold? Buy more? And many, I imagine, are using their gut to make that call. I recommend against that. If you find yourself in a similar position, ask our advisors to take a look. We score 3,000 stocks daily based on their probability to outperform and frequently share this intelligence with our clients. We can score the stocks in your portfolio and then help advise you on next steps. Though the approach can feel mechanical at first, once implemented, I think you’ll find it as freeing as launching up another 3-point shot.
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