"Moneyball" and the Game of Investing
Last week, I went to go see Moneyball, the movie based on the Michael Lewis best-seller, which itself was based on the unique approach Oakland Athletics General Manager Billy Beane took to assembling a winning baseball team.
Although I'm an avid baseball fan (Go Brewers!), I didn't go for the sports angle. Instead, I went with my investors glasses on. What I saw was brilliant, and what I'm here to tell you today is that the story holds a number of valuable investing lessons embedded in the story line.
About a month ago, I wrote a short bio on co-founding Fool David Gardner. While interviewing him, I asked where the roots were initially set for his wildly successful Rule Breaking style of investing. His answer surprised me: baseball guru Bill James.
Starting in the late 1970s, James developed a revolutionary system of evaluating why baseball teams win and lose. The system came to be called sabermetrics ("saber" is from SABR, or the Society for American Baseball Research). In the early 1980s, James began publishing his sabermetric findings in his Baseball Abstract publication -- and it soon became apparent that he had created a set of metrics that turned traditional baseball on its head.
Appeal to David Gardner
When a young David Gardner came upon James' ideas (back in the 1980s, before they were all the rage), he was immediately drawn to them for four main reasons:
- James' approach had to do with baseball, which was inherently appealing to David.
- It introduced him to the world of numerical contrarianism, which -- if you follow David's stock picks -- has been a hallmark of his Rule Breaking philosophy.
- The system was highly numerical and objective, and yet only a rudimentary understanding of fifth-grade math was necessary to dissect the numbers.
- There was accountability. James kept score of how well his numbers worked, and David thought that was crucial.
From balls and bats to brokers
As you may have noted, the parallels between James, Beane, and David are many. Below I've selected some choice quotes from Moneyball's trailer and switched out the baseball talk for investing lingo. The similarities are striking.
- "Your goal shouldn't be to buy players [stocks]; your goal should be to buy wins [businesses]." Since June 2005 when David first recommended it, Universal Display (NAS: PANL) shares have jumped 450%, but countless shareholders sold out along the way and missed out on a good part of those gains. For instance, this May's earnings release raised concerns about how higher costs could hurt the business going forward. But David still loves the underlying business, and as long as that's the case, he'll be holding.
- "We are card counters at the blackjack table. We're going to turn the odds on the casino." David thinks in terms of decades when he buys companies, which increases his odds of beating the market. A long-term timeline allows some surprising picks to climb their way to the top, like David's picks of priceline.com (NAS: PCLN) in 2004 and Chinese search engine Baidu (NAS: BIDU) in 2006. Both picks have risen more than tenfold.
David originally bought priceline because he thought it'd eventually be bought out, but because he holds for the long term, he's been the beneficiary of amazing growth. Baidu seemed like a risky pick given that early on. It existed between a rock (the Chinese government) and a hard place (Google), but things have gone splendidly since.
- "I believe there is a championship team [portfolio] we can afford because everyone else undervalues these players [companies]." Rule Breakers look in odd places for their ideas. Believe it or not, 10 years ago, few people would have thought Green Mountain Coffee Roasters (NAS: GMCR) Keurig Cup coffeemakers would have caught on. But they have, and early investors have gotten rewarded for their confidence.
People love the ease of making their own coffee at home without dealing with the grounds and filters they were used to. And the success of Green Mountain likely played a role in his team's selection of DIY soda maker SodaStream (NAS: SODA) earlier this year as well. David's team is counting on the ease and health benefits of making your own soda at home to engender the same kind of enthusiasm among consumers.
- "We've got to think differently." Perhaps no quote sums up David's philosophy better than this. Granted, David doesn't think differently just for the sake of it. He thinks differently because he's formulated a view of the stock market that makes sense to him, and it just so happens to be fundamentally at odds with the short-term, get-rich-quick stance of the broader market.
For Fools wishing to immerse themselves in both the world of baseball and investing, I suggest Lewis' book, as well as the movie. If you want to take it a step further, Bill James' writings are available at his website for $3 per month -- an investment I myself had no problem making.
And for those Fools looking for some immediate, actionable advice about the stock market, I strongly suggest taking a look at one of best special free reports: 5 Stocks The Motley Fool Owns -- And You Should Too. Inside, you'll get all the details on five companies that were handpicked by our top equity analysts. The report is yours today, absolutely free!
At the time this article was published Fool contributor Brian Stoffel is praying for a long post-season for his Brewers. He owns shares of SodaStream and Green Mountain Coffee Roasters. You can follow him on Twitter at @TMFStoffel.The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Baidu, Google, priceline.com, Green Mountain Coffee Roasters, Universal Display, and SodaStream, as well as creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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