Book Review: Moneyball and Investing
Today's book review is not a conventional one. It does not review the latest investing book by some big name research analyst or mutual fund manager, and is not a summary of some classic text on investing. In fact, on the surface it appears to be a baseball book. But the topic it deals with and the lessons applied to solving a particular problem have a very easy translation into individual investing. The book I'm talking about is Michael Lewis's Moneyball: The Art of Winning an Unfair Game, published in 2003.
Moneyball attempts to answer a single question: How does a small market team, the Oakland A's, consistently make the playoffs and compete with teams like the New York Yankees who can afford a payroll many multiples of Oakland's? The answer is that Oakland eschews conventional baseball wisdom and instead did it's own research into what attributes determine wins and losses in baseball. What Oakland found is that the traditional measures of a player - batting average, home runs, runs scored, etc. - were not the best measures of a player's value. Instead, they (with some help from the works of baseball researcher Bill James) found that often ignored statistics such as walks and on-base percentage were better determinations of the number of runs a team would score. What was even better was that the baseball marketplace undervalued these attributes, making some players who possessed them cheap to sign. The net effect was that Oakland was able to consistently win while spending much less on player payroll.
So what does all this have to do with investing? Well, think of the Oakland A's as a stock portfolio, with each individual player representing a stock. Now, Oakland's payroll is equivalent to the stock portfolio's cost basis. The singular goal for a baseball team is to win games, for a stock portfolio, it's to appreciate in dollars. By using research and historical facts, Oakland was able to acquire players who contribute significantly to winning for low prices - in effect, buying value. For investors, using research and historical facts, we can acquire businesses that are valuable at low prices, which leads to portfolio appreciation. While the A's used generally ignored statistics such as walks, we can use often ignored statistics such as return on capital to find valuable stocks. Our historical research and proof are provided in The Little Book that Beats The Market, instead of Bill James' publications. The lessons are the same.
But these lessons are even more valuable for investors than for baseball executives. Now that Oakland's methods are known, several teams have moved to copy their strategies, notably the Boston Red Sox, who went from no championships in 75 years to 2 in the last 4. However, in the investing world, there has not been and likely never will be a general move towards value stocks. Warren Buffett himself has said as much. Too many fund managers and investors are in it for the excitement, trying to catch the next growth story. This, of course, all too often leads to losing to the market.
MagicDiligence is always on the lookout for the next under-appreciated slugger of a stock, using return on capital and earnings yield as our on-base percentage, in our Top Buys portfolio. For those who like investing and baseball, I highly recommend checking out Lewis's Moneyball as the baseball companion to Greenblatt's The Little Book that Beats the Market.
Disclosure: Steve owns no stocks referenced here.
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