3/13/2011

“The Art of Winning an Unfair Game”

Michael Lewis wrote the outstanding book “Money Ball: The Art of Winning an Unfair Game”. He also wrote “The Big Short: Inside the Doomsday Machine “,”Liar's Poker” and many other great books. The lessons in Money Ball apply to small investors. Billy Bean the manager of the Oakland As had to build a winning team with a payroll only a tiny fraction of other teams. Now I’m not a baseball fan but years ago a baseball fan fanatic convinced me to read the book. He was a captured audience to my daily stories and theories on investing and thought the book was very similar to my investment approach. The book is a real life account about finding undervalued baseball players by ignoring the traditionally accepted attributes of what makes a great baseball player.

Since he was my boss I begrudgingly read the book and was floored by the parallels to our (many of the readers of this post) investing mind set. This was many years ago, early 2000.The As were buying the ugly, cheap, ignored, unloved neglected baseball prospects that when put together in a team produced spectacular results and eventually other teams year latter attempted to copy. The (As Oakland Athletics) beat the system for several years by exploiting the inefficiencies in the highly competitive recruiting process for baseball talent. The lessons wrote about in Money Ball apply not just to Baseball but every other sport, new business venture looking for talent, and any other highly competitive pursuit like investing.

http://en.wikipedia.org/wiki/Moneyball

“By re-evaluating the strategies that produce wins on the field, the 2002 Athletics, with approximately $41 million in salary, were competitive with larger market teams such as the New York Yankees, who spent over $125 million in payroll that same season. Because of the team's smaller revenues, Oakland is forced to find players undervalued by the market, and their system for finding value in undervalued players has proven itself thus far.”

So by looking for under appreciated/ undervalued attributes and ignoring the crowd or traditional metrics of putting a value on baseball prospects the Oakland As were wildly successful at finding overlooked undervalued players and building a great team for a fraction of the cost other teams spent with less results (games won). If one was to create a ratio to measure success based games won / cost to compile a team the return on invested capital would be the spectacular for the Oakland As. But like all high ROIC investments it will attract competition so continued innovation is required to stay one step ahead and maintain the advantage for any pursuit, sports, entrepreneurship or investing.

Hopefully this post will attempt to continue some of my thoughts on the overlooked, under appreciated use of data to help us find overlooked value creation. Hopefully some of the posts on this blog will help create your own wining team (Portfolio) to beat the market by looking at under appreciated data. There is no correct approach or method and we all need to customize based on our personality, time able to dedicate to investing, financial goals, temperament and the continually changing mood of the market.

To be continued shortly with specific examples but many of the ideas previously mentioned give examples of companies that are building value with overlooked financial metrics enabling us to buy below intrinsic value.

2 comments:

Anonymous said...

"" Hopefully some of the posts on this blog will help create your own wining team (Portfolio) to beat the market by looking at under appreciated data.""
I need all the help I can get, so thank you for taking the time and effort to help us find stocks for consideration that we would have otherwise never run across. Teresa

Anonymous said...

Thanks for all your work. I find your postings on the evolution of screen criteria especially useful. Teach a man to fish...