HYBRID VIGOR: VOL 3 ISSUE 39 "Building a Winner"

The Cubs haven’t won a World Series since 1908, the Indians since 1948. It only seems like the last solid year of convertible issuance fell somewhere in between.

What did it take for these two venerable franchises, long associated with losing, to get to baseball’s final countdown?  

The answer seems simple:  willingness to take some short-term pain to get big, longer-term benefits.

Look at the cores of both teams—developed internally, either by drafting players or acquiring them as prospects.  Yes, the Cubs are a rich team and have spent lavishly on several free agents, and apparently unwisely on at least one.  But their core is homegrown, either drafted (arguably their two best players, Javier Baez and Kris Bryant, were obtained this way) or traded for when young and relatively cheap.  While those players were developing, the Cubs lost a lot of games.  Fortunately, their fans were used to it—they’d developed a taste for it, you might say.

The Indians drafted their best position player, Francisco Lindor. They acquired their best starting pitcher, Corey Kluber, in a trade when he was a minor-league prospect. They then filled a big need by getting perhaps the best relief pitcher in all of baseball, Andrew Miller, in a trade with the Yankees, who didn’t seem good enough at the time of the trade to make sufficient use of his talents.

If you have been reading this space over the last couple of years, you probably know what’s coming. Yes, a convertible analogy. Convertible investing means building around a solid core—buying bonds with superior risk/reward profiles.  Then you can trade around your portfolio, filling in with certain underrepresented industry groups here, certain more aggressive or defensive profiles there, and so forth. If you’re a hedge fund, you try to tinker with your exposures, selling a little extra when you think the market’s overheated, buying it back when everyone wants to sell.  The Cubs got first baseman Anthony Rizzo in a trade with the notoriously incompetent San Diego Padres.  As CBS sportswriter Mike Axisa noted, “the Padres did not trade this Anthony Rizzo…he overhauled his mechanics (after the trade) …the Cubs bought low on Rizzo and have been rewarded with an MVP caliber player.”

Stock investing, sadly, is often ruled by momentum—buying high in hopes of selling even higher. Yes, it sometimes works. Bond investing, well, who knows these days? But convertible investing will always involve, and ultimately favor, a disciplined approach—buy when the risk/reward is good, sell when the edge is gone.  Be willing to go through a stretch of losses when you know you’re on the right side of value.  The idea of needing to win every year is like the idea of never being allowed to have a down month or quarter or even year. It’s not the way it works.  Do you hear me, box checkers of the world? Think about it when you’re watching the Series.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).