This article is one in a series looking at Jack Schwager’s classic investment books. The goal is to study interviews with famous traders and apply their wisdom to daily fantasy sports.
As the founder of Investor’s Business Daily and the author of How to Make Money in Stocks, William O’Neil has done more to educate the average American investor than everyone else featured in the Market Wizards books combined. His trading approach involves carefully screening for stocks that show the key components he has found to be essential for rapid growth.
In addition to having an impressive publishing history, O’Neil is also an accomplished trader. At the time of this interview, he had already logged a ten-year track record with more than a 40 percent annual return. He was involved in some of the most famous stock moves of his generation, owning shares in companies like Price Club (Costco) at the height of their rapid growth.
Let’s see if we can find some wisdom to apply to the DFS world.
I studied the stocks that were big winners in past years and tried to find the characteristics they had in common before they became major successes. I didn’t just limit myself to preconceived notions like P/E ratios; I examined a lot of variables to develop a model based on how the real world worked.
Price-to-earnings ratios are among the first market metrics every would-be stock trader studies. They are commonly used in the financial news to represent the value of a stock. But O’Neil refused to think of value only in terms of P/E ratios. Instead, he did his own research. What he found is that there are many other characteristics that can better predict a stock’s direction and velocity.
With the FantasyLabs Tools, we can do our own forward-looking research. Many of our competitors are satisfied to look at a player’s recent fantasy production or glance at his wOBA and ISO numbers. There’s nothing wrong with that data, but it might not be as valuable — it might not yield as high of a Plus/Minus — as wOBA and ISO Differentials, batted ball distance, and hard hit percentages, all of which are within our Player Models.
If we want to move beyond the basics and understand which advanced metrics are the best predictors of DFS success, we need to do our own outside-the-box research with the Trends tool. After that, we can use our findings to screen for the best players in upcoming slates.
Only Half the Time
The secret for winning in the stock market does not include being right all the time. In fact, you should be able to win even if you are right only half the time. The key is to lose the least amount of money possible when you are wrong.
We have seen some risk management discussion in every one of these Market Wizards interviews. Each trader approaches the market differently, but all of them have strict risk management. In O’Neil’s case, he specifies that you should be able to make money even if you are right only about half of the time.
From a cash game perspective, O’Neil’s guidance suggests that what we should prioritize in constructing lineups is limited downside. If a player has a high floor, he might not cost us a lot of money even if he ends up being a losing choice. One way in particular to find players with limited downside is to invest in players with high Bargain Ratings. If they play well, the edge they provide is substantial. If they play poorly, at least they were relatively cheap to acquire.
Focus on Core Holdings
Diversification is a hedge for ignorance. I think you are much better off owning a few stocks and knowing a great deal about them. By being very selective, you increase your chances of picking superior performers. You can also watch those stocks much more carefully, which is important in controlling risk.
O’Neil is famous for promoting the idea that an individual investor should focus on a small number of stocks. He teaches that being extremely selective about which stocks you trade will increase exposure to your biggest winners. He also believes that having a small portfolio will force you to get yourself out of losing positions faster.
As much as you might like to have a piece of every intriguing player on a slate, leveraging yourself to a small core of players can produce outsized results. By forcing yourself to invest in only the best of the best options when you construct rosters with the Lineup Builder, you increase your odds of having a big slate if your research is sound.
While you can clearly do research with the Trends tool to narrow your field of candidates, you can also use filters in the Lineup Builder to limit your exposure to a handful of players possessing the attributes you value.
O’Neil and DFS
O’Neil is one of the most famous traders featured in Market Wizards. He is also one of the few still trading today. We can take his advice about doing research, managing risk, and not hedging and apply it directly to DFS. If even a percentage of that wisdom trickles down into your daily process, you will be much closer to being a DFS Market Wizard.