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.
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:
- Moneyball's Home Run Insights
- Don't Listen to Buffett
- Moneyball's Undervalued Players
- Embrace the Unloved
- Finding Baseball and Stock Opportunities