The Storybook Season of the Oakland Athletics and What It Means for Investors

The Oakland Athletics may or may not be the best team in Major League Baseball -- facing an 0-2 deficit in the playoffs, that designation will be decided on the field over the next few weeks. We can say for certain, though, that Oakland, led by general manager Billy Beane, is the most efficient team in all of baseball.

Though Beane's player payroll was the second-lowest in all of baseball, his A's won 94 games this season, the second-highest total in the American League and the 10th-highest total since the team moved to Oakland in 1968. The A's paid the least amount of salary per win in the major leagues in 2012 -- by far.

Put another way, the A's won 25 more games than the Red Sox for less than a third of Boston's payroll.

How did the A's do more with far less? What was Beane's secret? These questions, of course, were precisely the ones that Michael Lewis asked almost a decade ago in his classic book Moneyball. A closer look at the A's remarkable 2012 season yields fruitful lessons for investors and students of business in general.

Full disclosure
We've been fans of Billy Beane for a long time. In fact, a group of Fools met Billy this July while in the Bay Area. We had an outstanding half-hour conversation with him about investing, how he thinks about player value, how he thinks about his payroll, and who some of his favorite young baseball players are. And after meeting Beane, a group of National League-following Fools has informally adopted the A's as their "American League team."

Moreover, the Fool has been a big believer in the idea behind Moneyball for years. We've hosted Moneyball author Michael Lewis at Fool Global Headquarters on three occasions. We've met with Paul DePodesta, the former assistant to Beane and current VP of player development for the New York Mets, who helped advance the idea of sabermetrics that Beane eventually used to rebuild the A's. We reference the book in our employee development programs, and our executives keep a copy of it on their desks.

How Moneyball works
In Moneyball, Lewis showed how the A's were able to win games cheaply by buying the qualities in a baseball player that the market undervalues, and selling the ones that the market overvalues. Ultimately, Billy Beane, according to Lewis, had seized upon "a system of thought to make what is an inherently uncertain judgment, the future of a baseball player, a little less uncertain..."

This year's A's showed that Billy Beane's approach can be extremely flexible and opportunistic when it comes to building a playoff team.

As Mark Reynolds noted in a recent post for Bleacher Report, rather than building a team of "slow, patient sluggers, Beane has built a faster, more athletic team that can still walk and hit home runs, but can also create runs on the bases and prevent them in the field."

On the pitching side, the team has relied heavily on young, relatively inexperienced players. An example is reliever Sean Doolittle, who appeared in 44 games, and struck out 60 batters in just over 47 innings. He had pitched in college, but was a first baseman and outfielder in the pros until multiple knee surgeries had him pitching again last year. Beane said recently that if you were to point to one story on this team, "the journey that Doolittle has taken is pretty amazing." But Doolittle's just the beginning of the rookie pitching magic. A's rookies won a record 54 games, according to the Elias Sports Bureau. And with the season on the line, a rookie started every single one of the final 14 games.

This shouldn't be surprising given that Moneyball is more about finding mispriced talent than it is about anchoring in on just one or two metrics.

Statistics are, of course, extremely important to Billy Beane and the A's, but they try to use whichever ones are meaningful in identifying undervalued talent. Billy Beane described his approach recently to Nate Silver, author of The Signal and the Noise:

The proportion of objective versus subjective analysis is weighted more in some organizations than in others. From our standpoint in Oakland, we're sort of forced into making objective decisions versus gut-feel decisions. If we in Oakland happen to be right on a gut-feel decision one time, my guess is it would be random. And we're not in a position to be making random decisions and hope we get lucky. If we're playing blackjack, and the dealer's showing a four and we have a six, hitting on sixteen just doesn't make sense for us.

Since Michael Lewis first wrote Moneyball, Beane's approach, according to Silver, has evolved considerably. He still, of course, relies heavily on sabermetrics -- the application of statistics to baseball. But he also places a lot of emphasis on great scouting. In fact, his scouting budget is now higher than it has ever been. Silver notes that it was Beane's focus on statistics that suggested it would be wise to increase his scouting budget. Beane is excited about the possibilities that will result from the marriage of stats and scouting. He told Silver that "the people who are coming into the game, the creativity, the intelligence --- it's unparalleled right now. In ten years if I applied for this job I wouldn't even get an interview."

What does this mean for investors?
The notion of finding mispriced assets is central to the discipline of investing. In an interview with The Motley Fool back in January 2011, David Einhorn, president of Greenlight Capital, shared his approach, which sounds very similar to Billy Beane's:

Our ideas start with a story. Is the market missing something that we see? Once we find an idea, the due diligence starts. We try to uncover a mispricing, and then we invest.

It was this type of approach that led Einhorn to invest in Apple back in 2010, when some investors thought the stock couldn't possibly rise any further. Similarly, the search for mispricing allowed Einhorn to recognize that Green Mountain Coffee Roasters was tremendously overvalued in the fall of 2011.

In a wonderful series of conversations between Michael Lewis and Motley Fool CEO Tom Gardner, Lewis discussed further how Moneyball relates to investing. He noted that inefficiencies are everywhere, so if they exist among baseball players, they likely exist among stocks. Lewis isn't a believer in efficient markets, and feels that, "those who can see through the irrationality and emotion have and will always have an opportunity for superior returns."

Lewis also thinks the market provides an opportunity for smart investors who are able to avoid getting caught up in the short-term noise of daily market action. Investors who are able to look at companies differently from traditional money managers may find themselves with opportunities to exploit. Ultimately, the goal of investors, according to Lewis, "must be to confirm the great measures, replace the poor ones, and capitalize on the loads of inefficiencies introduced by the underrating of smart conventions and the overrating of the many dumb ones."

To read Tom Gardner's entire interview with Michael Lewis, click on the following links:

link

John Reeves and Matthew Trogdon own shares of Apple. The Motley Fool owns shares of Apple and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Apple and 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.


Read/Post Comments (8) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2012, at 2:38 PM, Borbality wrote:

    Huge A's fan here, and no one saw this season coming. Definitely not even Beane. The A's are trying to move to San Jose and likely were just hoping to develop some players this season (traded away a lot of good major league talent for prospects who would likely take years to develop).

    Also, the A's best hitter this season is a complete unknown from Cuba, where only scouts were able to check him out and hope to have some kind of idea how he'd do in the U.S.

    He's turned out all-star MLB caliber already, but that is just one of those things that can really backfire. A's outbid every other team for an unknown international superstar who would need a visa to leave his country. I think it was $36 million for four years, which is a steal for an all-star outfielder entering his prime.

  • Report this Comment On October 09, 2012, at 2:53 PM, TMFCane wrote:

    Surprised my Dodgers didn't make the "least efficient" list, given the recent huge spending and the following lack of a playoff berth. Probably a lesson in there, too.

  • Report this Comment On October 09, 2012, at 6:16 PM, daveandrae wrote:

    Not a huge baseball fan, but I am a huge fan in the theory that markets, in general, are inefficient over short periods and yet, extremely E-fficient over longer periods.

    When put into the context of the stock market, I am still down on the securities I was buying just six months ago and yet, over the last three years, my portfolio has returned 18.92% on an annualized basis vs the roughly 11.32% of the s&p 500....and mind you, the s&p 500 has outperformed 78% of actively managed mutual funds over the same time period.

    Put simply, show me a cheap stock, and i'll show you ten people that not only wouldn't buy it, but would be more than happy to sell you, their shares.

  • Report this Comment On October 09, 2012, at 9:30 PM, damilkman wrote:

    I wish the author gave a better example of a how a player was well scouted by all but moneyball stated a given player was undervalued. I see a lot of rookies contributing. That tells me that Oaklands success is more about scouting then a different system of evaluation. I think a better example would be Brandon Inge. He is a good defensive third baseman with a ,little pop. With the addition of Fielder head no position as Cabrera moved to third. Inge did not work out at second base. But he had cheap value for the Atheletics. Wish there were more examples like that.

  • Report this Comment On October 09, 2012, at 11:42 PM, SuntanIronMan wrote:

    It also helps to have a few roided-up or high-T guys on your team (many during the era the book discusses and one just a few months ago).

  • Report this Comment On October 10, 2012, at 10:07 AM, TMFBane wrote:

    Thanks for your comments, everyone!

    I thought I'd share an example of what not to do in baseball. Back in 2010, the great WaPo sports columnist Thomas Boswell wrote about the $142 million deal the Red Sox provided to Carl Crawford:

    http://www.washingtonpost.com/wp-dyn/content/article/2010/12...

    Crawford appeared to be a great player. But he didn't play well in Fenway; didn't get on base a lot; didn't score runs, etc.

    In other words, the Sox messed up on this one big time. I also learned that Bill James -- who is the father of sabermetrics and was an advisor to the Sox -- was not a fan of the Carl Crawford acquisition. They should've listened to him.

  • Report this Comment On October 13, 2012, at 9:38 PM, trexer42 wrote:

    It probably wouldn't change the rankings given in the table, but a more nuanced view of cost efficiency of MLB teams would consider marginal payroll (over the cost of paying your whole roster the MLB minimum salary) and marginal wins (over the 50 or so wins that such a roster of minimum-salary talent would probably rack up). The late Doug Pappas originated this key insight. Google his name and "marginal wins" for more. I expect that such a comparison would make the A's look even better vs. the Red Sox (or my beloved but very expensive, underperforming Phils). The other lesson of the rankings given is that the Padres probably need to spend more to become competitive.

  • Report this Comment On October 27, 2012, at 2:04 PM, thidmark wrote:

    Considering the A's sucked the previous five years, I'd be more interested in learning about the keys to Tampa Bay's CONSISTENT success over the last several years with a similar payroll.

    And, no, I'm not a Rays fan ... if such a thing exists.

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