Growing up, you probably had a favorite baseball player. Being a Philadelphia native, mine was Mike Schmidt. Perhaps the best third baseman of all time, Schmidty led the league in home runs for eight seasons, RBIs for another four, and is 14th on the all-time home run list.
He was a true slugger, and I loved every bit of him.
Was Schmidt really that good?
Like every baseball fan, I spouted off stats like they meant something, but as Michael Lewis points out in Moneyball, stats are deceiving in several ways. They magnify essentially small differences, they conflate circumstances with skill, and they're often looking at the wrong thing.
For example, we place absurd emphasis on stats like RBIs. While RBIs are considered an individual achievement, to knock runners in, runners have to be in scoring position. A booming triple won't earn any RBIs if the bases are empty.
And it turns out that metrics like RBIs are poor predictors of overall success. The metrics that matter, however -- on-base percentage and slugging percentage, especially in combination -- aren't very well-known.
Johnny Bench? Reggie Jackson? They come to mind as some of the greatest players of all time, but what about Stan Musial? Or Mel Ott? Both of the latter players are significantly lesser known, yet their stats that matter are just as good or better. They're on the all-time list for walks, and consequently, they have higher on-base percentages than both Johnny Bench and Reggie Jackson. Oh -- and like Bench and Jackson, they have World Series rings as well.
I thought you were supposed to talk about stocks
The same problems with numbers happen in investing. The exciting, easy-to-find numbers often obscure the deeper stats that make the real difference between success and failure.
How often do value investors just look at companies with low price-to-earnings ratios, like Transocean
I often look for companies with low debt-to-equity ratios, low price-to-earnings multiples, and substantial free cash flow. Both Precision Drilling
If I'm looking for stable, dividend-producing stocks, I usually seek out companies with low multiples, substantial returns on equity, and high yields. Cellcom Israel
All of these companies have some good traits and bad -- it just goes to show what looks like a home run stock could really be a company that deserves more due diligence to see if it's truly worth your investment dollars.
The complete package
Hank Aaron has it all -- he's on the all-time home run list, he's on the all-time walk list, he has a World Series ring, and most importantly, he has an on-base percentage that rivals most. He's the complete package -- and you want the same from your stocks.
For instance, Johnson & Johnson
The experts at Motley Fool Stock Advisor use the same philosophy when recommending great stocks. They look for attractive valuations, clean balance sheets, and stable companies, but they also look at the whole picture -- just because a company has great cash flows doesn't necessitate a "buy." Just because a company pays extraordinary dividends doesn't mean it will continue to do so in the future. They keep digging into statistic after statistic, until they find stocks that form a complete package.
Tom and David Gardner, co-founders of the Motley Fool, recently advised members to buy Nucor
If you want to outperform the market -- and Stock Advisor is outperforming the S&P 500 by an average of over 60 percentage points per recommendation -- then you've got to find stocks that meet all of the important criteria, not just the most popular ones. If you'd like to see what else fits that bill, you can sign up for a free 30-day trial -- there's no obligation to subscribe. Just click here to get started.
This article was first published on Jan. 8, 2010. It has been updated.
Jordan DiPietro owns no shares mentioned above. Nucor is a Stock Advisor pick. Cellcom Israel and Precision Drilling are Global Gains recommendations. Johnson & Johnson is an Income Investor pick. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool's disclosure policy loves a good Ryan Howard-style home run.