“I want to do for rebounds what Michael Jordan did for dunks.” — Dennis Rodman
Last week I watched a documentary from ESPN’s 30 for 30 series entitled Bad Boys, which chronicled the rise of the Detroit Pistons during the late 1980’s and early 1990’s. During the mid to late 1980’s the NBA was dominated by the Los Angeles Lakers and the Boston Celtics with their iconic superstars in Magic Johnson and Larry Bird. The Detroit Pistons became an upcoming team after drafting star guard Isiah Thomas and making several savvy trades, but their efforts to reach the NBA finals always seemed to come up short when they would be ousted by Celtics. That is until they started giving more playing time to Dennis Rodman, a relatively unknown and underappreciated 2nd round draft pick (there are only 2 rounds in the NBA draft). The more Rodman was involved, the better the team did making it to the NBA finals in 1988 before losing to the Lakers and then winning the NBA championship against the Lakers and the Trail Blazers the following two seasons.
Unfortunately for the Pistons, their championship reign was sandwiched between the Magic Johnson/Larry Bird and the Michael Jordan eras so their dynasty was short lived. But that doesn’t change the fact that for that brief two year period of time they were the best team in basketball, and they accomplished it not by having a flashy offense but by playing tough defense and dominating the boards on rebounds thanks to none other than Mr. Rodman.
Dennis Rodman is probably best known for his antics off the court including his appearance (tattoos, piercings, haircuts, etc.), his brief relationship with Madonna, the fact he once did a press conference in a wedding dress, and his odd diplomatic relationship with North Korea, but all of this doesn’t change the fact that he was a game changing player on the basketball court even though he was sub-par (at best) when it came to scoring. Despite never averaging more than 11 points per game in any season, Dennis Rodman was inducted into the Basketball Hall of Fame because of his game changing ability to dominate rebounds on both sides of the court. The chart below from Skeptical Sports Analysis, which did an entire series on The Case for Dennis Rodman, shows how Dennis Rodman was a statistical outlier who dominated both the offensive and defensive glass.
Rodman led the league in rebounds per game for seven straight seasons while playing on three different teams (Pistons, Spurs, & Bulls). At the risk of getting too geeky with statistics, in his prime, Dennis Rodman was six standard deviations better at rebounding than anyone else in the league. No other player, including the great Magic Johnson, Larry Bird, or Michael Jordan, has ever reached that degree of statistical separation in any other skill (e.g. assists, points scored, steals, etc.). One could argue that the Pistons went from being a good basketball team to a championship team because of the addition of Dennis Rodman. By the end of his career, Rodman was part of five championship teams and dramatically improved the win-loss record of every team he joined.
So what can Dennis Rodman teach us about investing (you knew I’d get there eventually)? The parallels are quite simple. Dennis Rodman’s talents (defense and rebounding) were under appreciated by everyone in the NBA including the Pistons who drafted him 27th overall and didn’t insert him into the starting lineup until several seasons into his career. But as his career progressed, teams actually ended up scoring more points with him on the floor then without him. The value Rodman brought to his team was not his ability to score a bunch of points, but his ability to provide his teammates with extra scoring opportunities by creating extra possessions every game with his rebounding skill. To paraphrase Aristotle, the whole of a team with Rodman on the court was greater than the sum of individual player’s talents.
This same idea is true of portfolio construction as well. If you have a portfolio that is full of highly correlated investments that move All Together Now, then you will look like a rock star when all those investments are going up but feel like a goat when they eventually fall in lockstep. But if you combine a mix of uncorrelated investments together that don’t all rise and fall together, you end up improving your risk adjusted returns while also increasing the probability that you will stick to your investment discipline during times of crisis in any one particular asset class (stocks probably being the most significant one). A Dennis Rodman esk investment would be considered one that lags during a bull market (e.g. offense) but adds an enormous amount of value during bear markets (e.g. defense).
As many long-time readers already know, our investment philosophy is all about downside protection. We are firm believers that the “best offense is a good defense” and we do everything in our power to build portfolios to try to capture the Dennis Rodman Effect. We do this by looking at asset classes beyond traditional stocks and bonds (e.g. private equity, private debt, real estate, commodities, hedge fund strategies, etc.) as well as implementing a risk-management protocol for our publicly traded stock holdings. By doing this, our portfolios look and perform quite differently than the common US stock centric allocation (e.g. the S&P 500 or the Dow Jones Industrial Average). But even though it is frustrating to lag an arbitrary benchmark such as the Dow Jones during a bull market in stocks, we remain confident that over full market cycles, a strategy such as ours will prove that the whole is greater than the sum of its parts.
Hat tip to Artemis Capital Management who wrote an excellent article on this same topic and was another form of inspiration for this Insight.
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
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