Baseball and investing? At first glance, you may be inclined to believe that the two have absolutely nothing to do with each other. I mean, baseball and investing?! I too shared the same skepticism; however, after re-watching the movie Moneyball with my father recently, the connection finally became clear. In this article, I will attempt to draw out the resemblance to the best of my ability.
For those who are unfamiliar, Moneyball was originally a book written by New York Times bestselling author Michael Lewis. Other notable works by Lewis include The Blind Side and The Big Short. After its initial 2003 release, Moneyball was made into a motion picture in 2011. Starring Brad Pitt and Jonah Hill, Moneyball tells the story of the 2002 Oakland Athletics baseball season. More specifically, it recounts the unique and revolutionary approach that the team’s General Manager, Billy Beane, took in recruiting players.
After losing to the New York Yankees in the 2001 American League Divisional Series (ALDS), the Athletics lost many key players to free agency. Three of those players were Johnny Damon, Jason Giambi and Jason Isringhausen. Being a small-market franchise, the Athletics lacked the payrolls of most other teams in the league and could not afford to pay players enormous sums of money. Following the successful 2001 season, the demand for Damon, Giambi and Isringhausen increased tremendously. However, team’s meager financial resources prevented them from competing in the negotiations for those players. As a result, Johnny Damon signed with the Boston Red Sox, where he earned an average of $7.75 million per year over the course of four seasons; Jason Giambi signed with the New York Yankees, earning over $17 million per year across seven seasons; Jason Isringhausen signed with the St. Louis Cardinals for a salary of $6.75 million per year for four seasons.
After being stripped of their best players, Beane is faced with the challenge of fielding a competitive team given the financial constraints. To put into perspective how wide the gap between the rich and poor teams in Major League Baseball (MLB) was at the time, consider payrolls from the 2002 season. At the beginning of the season, the New York Yankees had a payroll of $125,928,583, the highest in the MLB, according to data from The Baseball Cube. By contrast, the Oakland Athletics had a payroll of only $40,004,167, the third lowest in the league.
At first, it seems that Beane is out of options. After all, how is a team with a payroll less than one-third of the richest team supposed to compete? However, while on a visit to Cleveland, Beane encounters a baseball analyst named Peter Brand who alters his view of baseball forever. A recent economics graduate of Yale University, Brand explains to Beane that the essence of baseball should not be to buy players, but rather to buy wins. And in order to buy wins, it is imperative that a team buy runs. Therefore, as long as players are able to get on base, they have a chance at generating runs, which is the only objective that should matter. According to Brand, the bloated payrolls of many teams in the MLB has caused players to sign contracts that dramatically overstate their intrinsic value. Likewise, it has also resulted in many undervalued players left without a team to play for. In fact, Brand conveys to Beane that he should feel relieved that Damon, Giambi and Isringhausen are no longer on the Athletics. To him, they were overvalued and simply took up too much of the team’s payroll.
Shortly after hiring Brand as the new Assistant General Manager, Beane set out to acquire players that, while capable of adding value to the team, were underappreciated by the market. This practice of buying out-of-favor players at discounted prices is identical to the principles of value investing, which prides itself on buying shares in companies that the broader market has neglected and not priced appropriately. As Warren Buffett, debatably the greatest investor of all time, once said, “Price is what you pay. Value is what you get.” In this quote, Buffett draws a crucial distinction between price and value. Essentially, Buffett is saying that the money one pays for something is not fully indicative of the value they will derive from it. In terms of baseball, just because a team is willing to pay a player $5 million per year, this does not mean that the intrinsic value of that player is $5 million per year. Therefore, the goal of value investors is to identify quality businesses that are trading below their intrinsic value. Not only does this create potentially substantial upside, but it also forms a comfortable margin of safety on the downside.
In the case of Beane and Brand, they sought to acquire quality players that could be signed for salaries below their intrinsic value. And that is exactly what they did. Prior to the start of the 2002 season, the Oakland Athletics signed players that had otherwise been ignored by other teams across the league. These players included David Justice, an outfielder who many believed to be past his prime, Chad Bradford, a pitcher who was dismissed because of his unconventional submarine-style pitching motion and Scott Hatteberg, a catcher who was written off completely following a serious nerve injury.
After a rough start to the season, the blowback from scouts, management, and the media was fierce. After 46 games, the Athletics had a record of 20-26, well out of playoff contention. People have constantly questioned the quantitative approach embraced by Beane, exclaiming that mathematics has no place in baseball. However, after arguing that the sample size was too small (a full MLB season consists of 162 games), Beane and Brand were able to convince the team’s manager, Art Howe, to stay the course.
Suddenly, the team began to turn it around. By the end of the regular season, the Oakland Athletics had a record of 103-59. Not only did they tie the New York Yankees for most regular season wins, they also won their division in the American League. However, the most notable achievement came during the second half of the season. From Aug.13 to Sept. 4, the Oakland Athletics did not lose a game. This translated to a winning streak of 20 consecutive games, which still represents the longest winning streak in MLB history.
The Oakland Athletics ended up losing to the Minnesota Twins in the 2002 American League Divisional Series; however, the power of their storied season continues to have a lasting impact on the sport of baseball today. Although, this should be the only area it influences. As outlined earlier, investors have much to learn from the story of the Oakland Athletics. While they may not have been looking for stocks to buy, Billy Beane and Peter Brand were certainly searching for value. One of the key components of a successful investor is being able to decipher the signal from the noise. By blocking out much of what is going on in the background, an investor can think clearer and initiate a worthwhile decision. Beane and Brand did just that, and were ultimately rewarded for their discipline.