TAMPA (FOX 13) - A recent study by a USF professor pinpoints similarities between the stock market and the baseball card industry. It shows a common Wall Street investment strategy pays even larger dividends when employed in the sports card market.
When Jared Williams was a boy, he noticed an obvious similarity between his childhood hobby – baseball cards – and his financial adviser father’s passion – the stock market.
"If a company announces earnings that are better than average, immediately the stock price will do well,” said Williams. “And similarly, in the baseball card market, if a player starts performing well, the price of his cards goes up."
An associate professor of finance at the University of South Florida, Williams and two colleagues recently used baseball cards to test a market trading strategy called momentum.
"Stock price momentum is the tendency for stocks that have done well in the recent past to continue out-performing stocks that have done poorly in the recent past," explained Williams.
He says momentum defies the general truths of trading because it is not based on risk; investors will buy a stock simply because it has been hot recently – even though on its face it seems to have the same level of risk as a stock that has not done well in recent weeks. It’s the equivalent of a baseball card collector buying the card of a certain player because fans and pundits deem that player is hot – or, in the case of new rookies, will be hot – even though there might be a player with comparable stats and potential for success that card collectors are not buying.
Williams says the momentum strategy has proven to return a monthly profit of almost one percent in the stock market – which is significant. He wanted to see what the strategy would yield in a hypothetical world of baseball card trading.
To conduct their test, Williams’ team used old issues of Beckett Baseball Card Monthly magazine, long considered the authority on card values. Over a span of six years-worth of magazines, starting in 1991, they tracked the monthly prices of 35,000 cards. With every month, they analyzed each card’s value over the past three months and hypothetically “bought” the 3,500 cards with the highest returns. They would hold onto those cards for three months and then sell them, regardless of how well each player was performing at the time.
"We found very strong evidence of momentum,” said Williams. “Much stronger evidence of momentum in the baseball card market than in the stock market."
Remember, in the stock market, the momentum strategy produces a return of almost one percent per month, which isn’t bad. But in the world of baseball cards in the 1990s, Williams found the strategy returned a profit of 5.5 percent per month. That’s more than 60 percent a year! He says if someone wanted to seriously make money off of baseball cards, they could employ that strategy: determine how much you’re willing to invest (how many cards you’re willing to buy at one time), analyze the top performers over the past three months, buy those and hold them for three months, then sell.
"If you notice some cards going up in value, it probably would be a good time to consider buying those cards,” said Williams. “And conversely, if you have some cards that are going down in value over the past couple of months, it might be a good time to sell them because it's likely that they will continue going down in value."
Take his advice with a small grain of salt. He hasn’t bought or sold any baseball cards since he was a kid. But he’s happy that his old hobby helped him and his colleagues gain insight on stock price momentum. He believes they provided support for a theory as to why momentum strategy works: gradual information diffusion. Their next step is to submit their paper to financial academic journals.
"It convinced us,” said Williams. “Now we'll see if other people are convinced."
You can read Williams’ study here: http://www.floridatrend.com/public/userfiles/news/pdfs/SSRN-id2798951.pdf