How To Beat The Yankees Of Investing
Baseball season is in full swing here in America. All around the country, in major league stadiums down to playground sandlots, the game is being played and watched by millions of children and adults.
It is little surprise that baseball is the favored sport of many investors. Several Major League Baseball owners, including Stuart Sternberg of the Tampa Bay Rays and Mark Walter of the L.A. Dodgers (among others), made their fortunes through money management and investing.
But this is an investing blog, so what does baseball have to do with investing?
In fact, a famous baseball book written over a decade ago and since worshipped by fans and made into a movie can teach us a lot of lessons about successful investing.
The Art of Winning An Unfair Game
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 eschewed conventional baseball wisdom and instead did its 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, GM Billy Beane and assistant Paul DePodesta ("Peter Brand" in the movie) - with an assist from the works of baseball researcher Bill James - found that once-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 is 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 or modernized statistics such as return on capital, earnings yield, or free cash flow yield to find valuable and undervalued stocks.
Instead of publications like Bill James' Baseball Abstracts and Handbooks, our fact-based research is provided by titles like Joel Greenblatt's The Little Book that Beats The Market, James O'Shaughnessy's What Works On Wall Street, and numerous other studies that show that simple and often ignored value criteria consistently outperform the market.
The "games" are different, but the lessons and methods are the same. Use research and facts - not standard conventions and dogma - to win the game.
Don't Play The Yankee's Game
"If we try to play like the Yankees in here, we will lose to the Yankees out there." - Brad Pitt as Billy Beane in Moneyball
So many investors try to beat the billion dollar hedge funds, mutual fund managers, and banks at their own game of short-term trading.
This is complete folly.
You cannot beat them at this game. This game is rigged. They have more connections than you and can get advance notice of upcoming deals, announcements, and news that drives short-term stock prices. They can attend investing conferences and get a jump on trading the news from them. They can meet directly with management. Most importantly, they can issue "analyst notes" and "price targets" that they know will drive a stock's short-term trading trajectory, and position themselves beforehand. Ever seen a stock dive 5% or more on a new analyst note? Exactly.
However, you can play a different game and come out on top.
Now that Oakland's methods are known in baseball, pretty much all teams have moved to copy their strategies. The Boston Red Sox were one of the first. Unlike the A's, the Red Sox have money, and by copying Oakland's strategies, the club went from no championships in 75 years to 3 in 9 years!
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. Why?
Because money management firms are under constant pressure to deliver quarterly and annual results. They sell themselves to new clients based on their past performance, and poor recent performance doesn't impress prospective clients. It is a cutthroat game with tons of competition, and it is rather easy for a client to leave for another manager if short-term performance turns poor. This is why they have always - and will always - focus on the short-term, with holding periods of months or even weeks.
With value investing, it takes more patience than that. Often the market can mis-price a stock for a year or even two before its value is fully realized. But as long as the underlying company is fundamentally sound, its value WILL be realized over time. Patience is the individual investor's biggest advantage over Wall Street.
As individual investors, we can't be the Yankees, but we can take some of the lessons learned from Moneyball and be like the Oakland A's instead.
MagicDiligence can help on this journey. Let us be the Paul DePodesta to your Billy Beane. Our stock "Spells" and subscriber tools will give you the information you need - quickly and easily - to find these overlooked and undervalued "players" to build your stock "roster" into a winner.
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