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Batting and Slugging Sensitivity

How does your batting and slugging compare to other fundamental managers? In this article by Alpha Theory CEO Cameron Hight, he discusses this common topic brought up by clients and blog subscribers and elaborates with an equation.

How does my batting and slugging compare to other fundamental managers?

This is a common discussion topic clients have and one we have written about extensively in our blog. They're curious about their batting average: the number of positions that make money (winners) divided by the total number of positions and their slugging percentage, the average winner divided by the average loser as it compares to other fundamental managers. Essentially, what it means to be a good stock picker.

Recently, we were working with a client who asked us how their batting and slugging compared to other clients and how batting and slugging turned into returns. The equation is straightforward:

Batting Winner * Avg Winner Return + Batting Loser * Avg Loser Return = Total Return

It was interesting to apply sensitivity analysis to the data to help contextualize it. What is good/bad batting and slugging?

To generate outsized returns, it is important to either 1) get both of them right or 2) apply leverage. Here is an example where slugging goes up, batting goes down, and vice versa. A great slugging of 2x is muted by a 41% batting average, and a great batting average of 59% is overwhelmed by a slugging of 0.5x.

Historical client batting and slugging were right around 50% and 1.0x on an alpha basis (adjusted for market returns) over the past 11 years. Those numbers are basically in line with the market. Alpha Theory position sizing had a batting of 57% and a slugging of 1.3x over that same time. This suggests that Alpha Theory clients have great research and that the benefits of process improvement are apparent.  

We have over 16 years of data that shows that great research coupled with a disciplined process leads to better returns.