I should put a picture of Brad Pitt here to keep the ladies interested, but I’m not going to. Go click on my about page if you want a picture of a sexy mug.
A couple of weeks ago, I went and watched Moneyball, mostly because I liked the book an unreasonable amount. The story chronicles the Oakland Athletics during the 2002 Major League Baseball season. After the 2001 season, the A’s lost three of their best players to free agency, meaning General Manager Billy Beane had to improvise. He didn’t have the payroll that other teams did, so he had to pick up players that could equal the production of the departed free agents, but at a fraction of the cost. (Spoiler alert!) He ends up finding those players, and after a slow start, the A’s end up winning their division, only to ultimately lose to the Minnesota Twins in the playoffs.
In the movie, Beane hired a guy named Peter Brand (who is based on Paul DePosta in real life) who was using advanced statistics to measure the value of players. Brand threw out statistics like batting average, exchanging it for on base percentage, a figure that measures walks along with batting average. RBIs are discounted greatly, because they’re dependant on who gets on base before you. This school of thought is called Sabermetrics, and as you can imagine, there was a great deal of resistance by old school baseball folks when people started looking at statistics differently.
Anyway, I’m boring you with baseball talk. If you want a very limited explanation of what Sabermetrics consists of, go see the movie. And if you’re looking for something a little more in depth, go read the book. As always, it’s better than the movie.
Anyway, back to the thesis. What can Moneyball teach you about investing?
Firstly, Moneyball stresses the importance of doing your research. The reason Beane and Brand were able to identify undervalued players is the amount of time they dedicated to the pursuit. Computer programs were built just for analyzing baseball data. Countless hours of research went into discovering a new way to identify a more effective way of disseminating this data. They were mocked for not having lives, and they didn’t care.
As a Moneyball investor, you need to spend the time doing your homework. Annual reports will be your new friend, along with listening to conference calls, countless web searches, and digesting other investor’s thoughts about whatever company you’re interested in. You will not cry when mocked for having no life. Okay, you can a little… IF YOU’RE A GIRL.
In the movie, Oakland picks up David Justice after the Yankees agree to pay a large portion of his salary just to make him go away. The hope was, for Oakland, that Justice would regain enough of his former glory to be a useful addition. When Oakland traded for Justice, it was well known that his speed and fielding range were suffering, thanks to a career full of knee injuries.
If you’ve been around here for any length of time, you can probably tell where I’m going with this. Contrarian investors have no problem investing in something where the short term outlook isn’t great. They take a look past public perception to the inner workings of the company, taking a good long look at the financial statements. Once they find a company the public hates with a strong balance sheet and is still making money, they’ll pounce, and then just wait for the turnaround.
Yeah, sometimes the turnaround doesn’t happen. I’ve held stocks for years that have floundered and did absolutely nothing. I’ve also had stocks that have both succeeded and failed equally spectacularly. The beauty of investing this way is that when a stock works out for you, it really works out for you. It’s just like in Moneyball. David Justice had low expectations, and taking a gamble was a high risk high reward scenario- except the Yankees paid most of his salary, significantly reducing the risk for Oakland. You should invest like that.
The movie touches on this next topic a little, but the book delves into it in much more detail. When drafting players, teams would look at tools more than they’d look at actual statistics. This means that when a scout would go watch a player play, he’d look at how athletic his swing was, rather than how good the player was at getting on base. Players who didn’t look athletic were hardly given the time of day, no matter how good their stats were. Players were rewarded more for potential than actual performance.
People make the same mistakes investing. For a while this summer, Netflix traded at over 100 times earnings. Investors were gaga over Netflix not because performance was good (which, admittedly, it was) but because of the potential for even greater future performance. As a result of that rosy looking future, investors were willing to pay a huge premium to get their hands on the next big thing.
Sometimes, the next big thing works out for investors. Both Google and Apple traded at some very high multiples to their earnings, yet both delivered consistently for years, letting the earnings catch up to the share price, thereby making their valuations much more reasonable. Google and Apple are the 1st round draft picks that work out. To switch sports for a second, there’s always a Alexander Diagle to compliment a Sidney Crosby. Sometimes, the high flying stocks come crashing back down.
If you want to learn about value investing and can’t bear to pick up an investing book, Moneyball would be a decent place to start. You’re probably going to have to pick up an investing book at some point if you want to learn about, you know, investing. Might I recommend some in my reading list?
Zing! Ended this one with a shameless plug!
*Oh, and P.S., the movie doesn’t even mention the fact that Oakland got ridiculously good starting pitching during 2002, thereby making moves for those hitters much less important.
Also, congratulate the winner of the Wealthy Barber Returns book, Holy Potato, with his entry- Financial Uproar: doesn’t matter who’s right or wrong, I’m the loudest. Join the UPROAR. I’ll be emailing Potato soon. Thanks everyone for entering.
Follow Me!