Last week, I came across a fabulous resignation letter of Sam Hinkie who served as the general manager of the National Basketball Association’s (NBA) Philadelphia 76ers from 2013 to 2016. He has also consulted for several National Football League teams. A resignation letter that I would love to re-read from time to time.

I’m sure your first thought would be that writer has gone nuts! How can a resignation letter be wonderful? The words Resignation and Wonderful simply don’t match each other. 

The reason is his cross-pollination of ideas from the world of investment. Hinkie goes on to quote Howard Marks, Seth Klarman, Charlie Munger, Warren Buffet to name a few. He has somehow taken the best out of them and applied in running a basketball team. A sports person taking ideas from investment world has been an unheard event to me. If you have come across anyone who cross pollinates ideas then please write about them in the comment section below, we would love to hear more about them.

“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger

A brief history of Sam Hinkie and Philadephia 76ers

The 76ers hired Sam Hinkie in May 2013. The team’s owners, led by private equity investors, chose him for his analytics acumen. They figured Hinkie, a Stanford MBA, could Moneyball the 76ers to greatness. When Hinkie interviewed for the job, he made it clear to the owners that he thought they were “a long way away” from winning big. The cupboard was bare of talent, and if they wanted to win a championship in the long term, their best way forward would involve a lot of losing in the short term.

Here’s his thinking: Historically, in the National Basketball Association (NBA), the teams that win championships rely on star players such as Michael Jordan and Lebron James. Hinkie believed the surest way for the 76ers to get a star of that caliber was to have a high pick in the amateur draft (the annual process through which newly eligible players are selected by the NBA’s 32 teams). The highest draft picks are awarded to the worst teams, and if the 76ers were bad enough for long enough, he argued, they would eventually get a great player. It would take patience though.

Hinkie warned his bosses, the team, and its fans that the short term would be painful, and it most certainly was. Almost immediately upon Hinkie’s hiring, the team began “tanking”—the sports term for losing on purpose. Hinkie traded the team’s best players and made no attempts to acquire players that would make it better.

Over the next three years, the 76ers were horrible. They lost more games than any other team, and broke the NBA’s record for consecutive games lost. It all culminated in the third season when the team won only 10 of 82 games, making it the second worst NBA team of all time. One prominent sports writer called the team an “abomination,” and another an “atrocity“. Observers called for the NBA to intervene and have Hinkie replaced with a manager who wouldn’t tank. The team’s attendance and tv ratings were among the lowest in the league.

But even at the worst depths of history-making failure, many of the team’s hardcore fans were steadfast in their support of Hinkie. Unlike his predecessors, Hinkie offered a concrete plan based on quantitative analysis. The team was an embarrassment on the court, but they were getting talented young players with high draft picks who might some day become stars.

“[Before Hinkie, the 76ers] just had mediocre teams playing mediocre basketball, being incredible boring… and having no plan,” said Michael Levin, a lifelong 76ers fan and host of the popular 76ers podcast The Rights to Ricky Sanchez. Levin was immediately enamored of Hinkie, he told Quartz. He was happy that the team was finally ”thinking long-term at expense of any short-terms gains.”

In April 2016, Hinkie stepped down. “Given all the changes to our organization, I no longer have the confidence that I can make good decisions on behalf of investors in the Sixers….” Hinkie wrote in his 13-page resignation letter to the 76ers board. The resignation letter served as a defense of his decision-making, as well as a kind of philosophical treatise that includes references to Elon Musk, cognitive science, the physicist James Clerk Maxwell, and Jeff Bezos’s 10,000 year clock. The letter cemented Hinkie’s reputation as a mad genius or a fool—all depending on your point of view.

By January 2017, it finally became clear that Hinkie was right all along. The 76ers have won more than half of their games over the last month. The team’s talented young players are blossoming, and it is in a strong position to acquire more excellent players going forward.

Most emblematic of Hinkie’s success is the emerging stardom of the 76ers’ agile giant Joel Embiid. Hinkie drafted the 7-foot Cameroonian in 2014 even though he had a broken bone in his foot that would not allow him to play for six months. Embiid was a player of immense talent, and because the 76ers were not worried about winning in the short term, the injury did not deter Hinkie from drafting him. 

Correlation to our Investment Process

As many of our readers are aware that we follow a strict quant driven approach for our investing our client’s money in mutual funds. We call it Dynamic P/E Asset Allocation Strategy. It’s purely process oriented that takes away any emotional input for buying or selling any mutual funds.

The key objective of our strategy is to provide risk adjusted returns compared to Nifty. This attribute can be seen in the lower standard deviation and better sharpe ratio in our portfolio. Standard deviation can be construed as a measure of risk in the portfolio and sharpe ratio is return generated by per unit risk taken.

Having a standard deviation of 7.74 which is significantly lesser than Nifty’s standard deviation of 13.45 has resulted in lower volatility in the portfolio. That has created a peaceful investment journey!

Just like the process of Sam Hinkie when he intentionally tanked the team down for creating a winning team, our quant model too asks us to invest in equity when market is sliding down. We have to see red in our equity portfolio for a little while as the market bottoms out. This is the whole purpose of our quant model to take rational investment decisions by looking at numbers and not falling for emotions such as fear and greed.

We are not an expert at catching the bottom of the market. Our process is not for timing the stock market accurately either. Nobody can do that all the time. 

Even the greatest investor – Warren Buffet cannot. Even Isaac Newton once famously quoted “I can calculate the motion of heavenly bodies, but not the madness of people” while talking about his inability to time the market correctly.

There many quant models out there who successfully outperform their respective benchmarks. We are comfortable with our current quant model that has enabled us to manage risk in the portfolio as well as outperform Nifty. 

That’s why we echo the words of Sam Hinkie – Trust The Process!

– Jinay Savla

Disclaimer: The intention of this blog is not to advertise about our portfolio allocation strategy or ourselves as superior financial advisors. The intention here is to create a faith in Process or System that every Investor must follow in every market condition. Just by falling into emotions and taking wrong decisions will do more bad for an investor than good. Once again, Trust The Process!