Altus Insight August, 2018

~The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor

Date: August 31, 2018
FR: Forrest Jinks
RE: Wisdom versus Knowledge

Growing up I loved baseball. Even as a little boy I would listen to every game of my hometown San Francisco Giants, lugging around a portable radio larger than I was, so I didn’t miss a pitch. Even at that young age, I loved the way the game was broken down into the various statistics; batting average, earned run average (ERA), wins/losses, runs batted in (RBI), etc.

Since the days of my youth, baseball, even as leader among sports in statistical measurements, has gone through an analytical awakening. A few “stat heads” decided that a large component of baseball was luck and set out to measure performance independent of team performance and/or luck. No more are RBIs, or even Wins and Losses, valued statistics. The thinking is that RBIs are a function of other players on the team being on base when a player comes to the plate, so that player shouldn’t be compensated for knocking them in (or conversely, not compensated for lacking strong RBI tallies). Likewise, Wins and Losses are based on the entire team’s performance, so a pitcher shouldn’t be compensated or penalized based on the excellence or shortcomings of his teammates.

New measurements have become common parlance: WHIP (walks and hits per innings pitched) is now considered a more valuable measurement tool than ERA. OPS (On-base Percentage plus Slugging Percentage) has taken over as a better measurement than Batting Average. And it continues to get more and more detailed and granular with new statistics such as Exit Velocity (the speed the ball leaves the bat), Line Drive Rate, Batting Average on balls in play (to determine if someone has been lucky or not), Wins Above Replacement (WAR), etc.

The detail that is now being measured has changed the way the game is played. Steals are no longer considered valuable. Players don’t choke up on the bat with two strikes to avoid strikeouts, with common thinking that strikeouts don’t matter, and it is better to trade the risk of striking out for the increased likelihood of hitting the ball hard somewhere. Major defensive shifts have become a strategic normality, because hitters have been so focused on hitting the ball hard they never learned the skill necessary to direct where they hit the ball.

The data, and the knowledge of how to use that data, continues to grow.

There is nothing wrong with analytics, and it is likely those responsible for constructing baseball teams are better at assigning value to players when they have the analytical data in hand. But there is also the fact that the increased knowledge around the analytics has given management and players alike tunnel vision on factors other than on the most important thing to success – what do we have to do today - this inning - this pitch, to win the game we are playing. Knowledge at the expense of wisdom.

I don’t know that wisdom and knowledge are often differentiated in our thinking, but definitionally they are quite different. I like to think of them this way:

                   Knowledge: Knowing how to do something (measure baseball performance for instance)

                   Wisdom: Knowing what to do or when to do something

The problem is that application of knowledge is easily quantifiable, and the more detailed the knowledge, the easier it is to quantify changes to the data based on the application of the knowledge. Wisdom is often not so. Because wisdom changes the very path of performance, any judgement on the relative wisdom of a decision is made in the informational vacuum of not knowing what other outcomes may have existed had a different decision/action be taken (or even no decision/action).

In two games in a row this past week, the Giants were tied with their opponents late in the game. In both games, they had a runner on third base with no outs. In both games, the defense chose to leave their infield playing back. Any ground ball to an infielder would have scored a run. Additionally, any fly ball that was hit even decently well would have scored a run. In these two situations getting that run home was key. So, it makes sense that the batters would make adjustments to their approach to make sure they simply put the ball in play. Instead, and because of the ongoing and increasing focus on “good at bats” and “hard hit balls” and to the marginalization of stats like RBIs, no change was made to the approach of the at bat. The hitters didn’t choke up with two strikes and they didn’t change their swings to make sure they put the ball in play. In both instances, the batters struck out and the run didn’t score. In both instances, it cost the team victories. But because of the what is being measured, and therefore valued, had the batters changed their approach and just got the ball in play they would have been sacrificing their own statistics, and therefore future compensation.

At the end of the day and in the bigger picture, what is most important? Wins and Losses of course. What leads to Wins and Losses? More runs being scored than runs allowed within each game. Earned run average, as the measurement of runs scoring, matters. Runs batted in (and runs scored), compiled into the measurement of runs being scored by a team matters. But a loss of focus on those things that ultimately impact the final score, results have been managed in such ways that the very things that determine wins are not being managed well.

This can easily happen in our business and investing decisions as well.

As I write this, I am on a plane flying to Oklahoma City where we own several apartment complexes. Unlike most of our commercial property, we outsource the property management of our apartments to third-party management companies. We recently made the substantial decision to replace the management company that managed over 700 units in OKC. I am travelling to OKC to help mitigate fallout as the existing company hands over controls to the new company coming in. The company being replaced wasn’t doing a terrible job, but they also weren’t hitting the expectations we had laid out. Are we unrealistic in our expectations? Are we focused on measuring the right things? Because of the relatively long lead time between action and result within the apartment management business, the easy answer is ‘only time will tell’, but even that isn’t entirely true. As time passes, and actions should be judged by the measurable changes, there is also the changing market conditions that affect outcomes. We will never know for certain if this decision was a good one. It certainly is a lot of work to make a change like this, but in our best efforts toward wisdom the decision was made for the change. While this may be an area where knowledge could be used to justify the wisdom of our choices, there was no way knowledge on its own could produce the choice.

In our asset management there are certain things we religiously measure. This process, of trying to make wise choices around our property managers, has opened our eyes to the possibility that what we were focusing on, while valuable, might not have been the key statistics that determine whether we are winning the game. Did we get so caught up with “exit velocity” and “line drive rate” that we took our eyes off the more important RBIs, Wins, and Losses?

Knowing which things to measure is wisdom in and of itself, but the statistics produced are still worthless if good decisions then aren’t made with those statistics. This isn’t just true with asset management of apartments. It is also true with knowing how to allocate resources within a business or investment portfolio. It is true when setting goals, raising children, and so, so much more.

Are we measuring the correct items?

Are we making decisions based on fears or knee jerk reactions?

What are the risks around decisions we are making?

What are the uncertainties/unknowns of decisions we are making?

Do the potential benefits of a decision outweigh the cost and/or potential downside?

Who will this decision affect, and how? Is that who it should affect?

And much, much more.

Happy Investing.

Forrest Jinks
Altus Equity Group, LP
off: 707/932-5887
www.altusequity.com

About the Author: Forrest Jinks is a managing director of Altus Equity Group, LP and licensed real estate broker. Forrest has many years of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at fjinks@altusequity.com.