Moneyball's Undervalued Players

Some call it the best business book out there. Michael Lewis is the author of the best-sellingMoneyball, a look into the roaring recent success of the Oakland A's baseball team gained through their contrary thinking and unconventional means. Tom Gardner found the lessons from Lewis' book quite applicable to general stock investing and very relevant in his search for undiscovered, unloved, and undervalued small-capHidden Gems. And since this is World Series week, we think it's a great time to share this with you. This is the fifth of five parts. Play ball!

Tom Gardner: Do you find yourself wanting to get into the baseball market having done all this work? Own a minor league team? Look for the next-generation high-school players that will rule the major leagues someday?

Michael Lewis: If I didn't have the luxury of doing what I did for a living, if I didn't have the luxury of being able to write about it and having such pleasure in writing about it, I would say yes. But I just have so much fun doing what I'm doing. But if I were a slightly bored money manager, I would be there in a moment because, yes, it is a really interesting challenge. Owning an independent league baseball team would be one way to go about it, but the real way to go about it would be to buy your own big-league baseball team.

Tom Gardner: Or maybe be an agent.

Michael Lewis: Or be an agent, there you go. Be an agent. I mean, you wonder why the agent Scott Boris isn't making these sort of decisions. The way the agents seem to work is they just take the values that are imposed on the amateur players by baseball as it is now and then say, "We want those guys because they get the biggest upfront contracts." But if you could find the sleepers, my God, they are much more lucrative over the course of their careers.

Tom Gardner: Do you agree with me that Paul Depodesta, formerly of the A's, may be the smartest guy of all the characters you have written about in Moneyball? He turns down the Blue Jays job, knowing that everyone is going to emulate their approach, and that there is going to be a regression to the mean. So he waits until he can get a big, fat budget to work with. He waits for the L.A. Dodgers job. And he now can throw tremendous amounts of money behind the masterful statistical work that he's been doing for 10 years.

Michael Lewis: Well, if Paul's wife had been Canadian and not Mexican, he would have taken that job in Toronto.

Tom Gardner: (Laughing) OK, I didn't realize that!

Michael Lewis: It is true that he finds himself right now in the catbird seat in Los Angeles. But it is also true that he had no way of knowing that he would get there. It was serendipity that he got that job. If Billy Beane had wanted the Dodgers job, Billy Beane would have had it. And if this wave, this revolution in baseball had not gathered steam the way it has, Pat Gillick would've had the job.

So I think that, yes, it's great for him that he is in the position he's in, but I don't think he planned it as much as all that.

Tom Gardner: Yes, I understand now. Michael, tell me about the Ruskin quote you used at the outset of Moneyball. Explain what you meant by including it.

Michael Lewis:(Laughing) I've got to go dig out my book and see what I put there...

Tom Gardner: OK, paraphrased, it is, "The man who wraps himself in gold as his ship is sinking... ask yourself, 'Did he get the gold at the bottom of the ocean or did the gold get him?'"

Michael Lewis: Well, that's there because I always thought of this book as a book about the illusion of wealth vs. the real value of gaining wisdom and understanding. You see, the reason that Billy Beane and Paul Depodesta could do what they did with the Oakland A's is that you had all these teams, the Yankees being a sound example, but maybe not the best example. The Texas Rangers are a great example. They felt that all along the thing to have was the gold, the money. If you had the money, you could buy this great baseball team and put the Oakland A's out of business.

So, in a funny way, they were trapped by the idea of the importance of money. Contrary to that, Billy Beane was liberated by this penny-pinching owner who wouldn't give him the money to compete. So Beane was liberated into the search for understanding rather than a reliance on a large amount of capital to buy his way out of ignorance.

Tom Gardner: That's like Bill James, who writes that it is much more rewarding to be right when the world is wrong than to be rich.

Michael Lewis: Yes. And he says, "Oh, to have that feeling once more before I die." I am now finding that in other walks of life, there are Bill James types, but none of them have quite so rich a story as Bill James.

You just have to stop to think about how extraordinary he is and what an inspiration he should be to money managers. This thing, baseball, has been going on for 100 years in full view. Everyone thinks they know it. And Bill James is a night watchman at a Stokely Van Camp's pork and bean factory who has no real background in math, in statistics. He's an English major who just starts to think and discovers the joy of rethinking conventional assumptions. And in doing it, he revolutionizes the entire sport. That is an incredible story.

Tom Gardner: What story are you working on now?

Michael Lewis: I've always got bunches of stuff going but two primary projects. If you came to my office, you would see a bench and on that bench are eight piles. Each pile is a different project. There are two piles on the right of the bench and those are two piles I'm working on at the moment. One of them is I am turning an article I wrote in The New York TimesMagazine about my high school baseball coach into a television pilot.

The second thing is, when I signed up Moneyball as a book, it was after the 2002 amateur draft when the A's had some of the top picks in the draft and they picked all these guys that nobody thought they were going to pick. They surprised baseball teams across the league by drafting a collection of unknowns. I knew that there was another book in all of this. A book following those guys through their minor league careers to see if Oakland's management team was right when everyone thought they were insane.

Tom Gardner: Players from your book like Jeremy Brown.

Michael Lewis: Yup. I've been spending the summer with him.

Tom Gardner: That's great, because when you complete the book, you want to see how each of these guys is doing. Nick Swisher, as you saw, just came up and was on fire in the first few games. That's totally random at this point, but obviously it is fun to see.

Michael Lewis: Yes, I just got back from Toronto because I was there when Swisher was making his debut. When he was brought up, I bet Billy. I said I bet he gets a hit in his first game and I bet he homers in his first series. And he did. He made me look like a genius.

Tom Gardner: And he drew a couple of walks.

Michael Lewis: He drew three walks and got hit by a pitch. It is fun. I feel like my babies are growing up because I went and met all these guys right when they got drafted. And I have been watching them go through the minors and now Swisher is the first. But next year there are likely to be four or five of these guys in the big leagues.

Tom Gardner: They are like small-cap companies earning their way into the popular indices, gathering momentum, and rising in value.

Michael Lewis: Yes, they are.

Tom Gardner: Michael, thanks very much for taking the time out to talk. You've helped a lot of people understand the money business, the baseball business, and the stock market with your books. I've thoroughly enjoyed them and highly recommend Moneyball and Liar's Poker to all our Hidden Gems members.

Michael Lewis: Thanks very much, Tom. Best of luck to you.

Tom Gardner publishes dozens of CEO and investing expert interviews for Hidden Gems members. Click here to read about our 30-day no-risk free trial.


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