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Posted 7/12/2001
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The Speculator
Baseball’s lesson: Invest in home runs
Leaders at the break are usually on top at the end, a statistic as telling in a portfolio as it is on a diamond. Here's what this year's first half says about the second -- and why we might all hope for a National League win.
By Victor Niederhoffer and Laurel Kenner
When you’re hitting you hit, and when you’re not hitting – well, you just don’t hit.
-- Roy Campanella, quoted in Life, Jan. 8, 1953
The All-Star Game, coming roughly in the middle of Major League Baseball’s season, is a time to rest from competition and enjoy the top players. It also provides an opportunity for fans of both the game and the markets to take stock of the current winners and losers.
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What we’ve found is that leading teams and stocks of the first half tend to keep outperforming in the rest of the season.
Let’s start with baseball. With able assistance from Larry DiTore of the Bloomberg News sports desk, we found that the statistics for the All-Star leaders in baseball reveal some striking regularities: The team that’s ahead in its division at the All-Star game almost invariably finishes ahead.
During the past seven years, of the 42 division leaders at the midsummer break, 34 finished the season on top -- an 81% win rate. Remarkably, there was no regression to the mean -- winners kept their win-loss rate at about 59% for both halves.
Out on the diamonds, those numbers augur well this year for Philadelphia, the Chicago Cubs and Arizona -- the respective leaders of the East, Central and Western divisions in the National League -- and for the New York Yankees, Minnesota and Seattle, their American League counterparts.
Of course, instances abound of the fickleness of stardom. Thus, Luis Gonzalez of the Arizona Diamondbacks beat defending champion Sammy Sosa of the Chicago Cubs in the All-Star Home Run Derby on Monday. And we are informed by a statistically minded reader that of the recent homer leaders at the All-Star break, only Mark McGwire in '98 finished the season as the home run king.
With those caveats in mind, let’s see if the tendency for winners in baseball to stay on top holds true for stocks.
Stocks aren’t quite baseball
We found the five best and worst performers in the Standard & Poor’s 500 Index ($INX) for the year through July 3, a natural midsummer cutoff point, for the past five years. (We took care to include only companies that were actually in the index at the start of the year.) We then calculated their performance in the remaining part of the year.
Second-half performance for first-half winners and losers
| Year | Avg. % chg of best 5* | Avg. % chg of worst 5* |
| 1996 | 17 | 15 |
| 1997 | 13 | -13 |
| 1998 | 31 | -0.2 |
| 1999 | 43 | 23 |
| 2000 | -57 | 6 |
In 1997, 1998 and 1999, the first-half winners handily outperformed losers during the second half. In 1996, they were about even. So far, so good. Taking into account the variability of the data, it was a significant result.
But 2000 brought a complete reversal of fortune -- or, as we like to say, the cycles changed. The first half’s top five fell 57% in the second half, while the worst five rose 6%.
In sum, the average for the best five during the past four years was a gain of 9.5%, with a standard deviation of 38.9. For the worst five, the average move was a gain of 6.1%, with standard deviation 13.9.
Regrettably, the average variability of both winning and losing groups is much larger than the difference in the means. Thus, we have here the proverbial case of a theory in which neither refutation nor acceptance is appropriate. We must suspend belief until more data comes in.
All things considered, however, we suspect that the unfavorable conditions that waylaid the market’s leaders last year were anomalous. Under the circumstances, we hereby list the S&P 500’s All-Star winners and losers for 2001, as of July 3.
All-Star winners and losers, 2001
| Winners | % chg | Losers | % chg |
| J.C. Penney (JCP, news, msgs) | 142 | Network Appliance (NTAP, news, msgs) | -80 |
| Best Buy (BBY, news, msgs) | 131 | Palm (PALM, news, msgs) | -78 |
| Kmart (KM, news, msgs) | 118 | Applied Micro Circuits (AMCC, news, msgs) | -77 |
| Compuware (CPWR, news, msgs) | 117 | Applied Biosystems (ABI, news, msgs) | -72 |
| Advanced Micro Devices (AMD, news, msgs) | 115 | Nortel Networks (NT, news, msgs) | -72 |
It’s so much easier to come up with a system in retrospect. As manager Earl Weaver said, “It’s what you learn after you know it all that counts.”
We feel the same way about predicting. So we turn it over to you, the manager.
New All-Star indicator
We are very fortunate to have among our correspondents many people who know much more about what we write about than we do. We often rely on one of them, Duncan Coker, an independent investor and former industrialist from Telluride, Colo., for insights into fly-fishing. He’s also one of the millions of Americans out there who find peace in calculating numbers concerning the beautiful national pastime of fathers playing catch with their kids.
On Tuesday, a 12-week low for the S&P 500 and Nasdaq ($COMPX), Coker invented the baseball equivalent of the Super Bowl indicator. He wrote us:
“According to my counting, a National League win is bullish. Using games from 1933-2000, no game in 1945 and second games in 1959, 1960, 1961 and 1962 when they played twice, I find the following results for the second half of the S&P 500:
- 37 NL wins: S&P 500 up 4.44%; standard deviation 10.64.
Coker also looked at what happened in years when the S&P 500 was down through June, as was the case this year (-7.3%).
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- 15 NL wins: S&P 500 up 3.02%; standard deviation 14.24.
“The standard deviations are large,” Coker concluded, “but it still looks bullish for a National League win.”
The American League's victory in Seattle on Tuesday night wasn't good news for the bulls, if you believe this metric has any value. On the other hand, we note that the American League also won the All-Star Game in each of the previous four years -- a period not altogether bearish for the stock market. So while we suspend judgment for now, with chaw and tongue in cheek, we can at least begin gathering data on a new twist for this concept: What happens to the Korean Composite Stock Price Index, or KOSPI ($KRDOWD), every time a Korean pitcher loses in the All-Star Game, as Chan Ho Park did on Tuesday?
At the time of publication, neither Vic Niederhoffer nor Laurel Kenner owned any stocks mentioned in this column.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.