The Superinvestors Of Oakland Athletics

By The Noble Contrarian on April 7, 2011 in Other

Oakland sits on the wrong side of San Francisco Bay, away from the limelight, trolley cars and tourist buses of its prettier sister. Crime-ridden and poor, no one writes stories about the streets of Oakland.

The city’s major league baseball team, the Oakland Athletics, in many ways mirrors the characteristics of the city it represents. Its player budget is a fraction of those at more glitzy clubs like the New York Yankees.

A poor club doing well in Major League Baseball is akin to a 70kg accountant knocking out a heavyweight boxer. Yet the Athletics consistently rank highly, proving an annoying aberration to the rule that, in baseball, money and success are inextricably linked. The club was doing something right, and Michael Lewis, the former Salomon Brothers trader who wrote Liar’s Poker, set out to find out what it was.

Moneyball isn’t a new book, being released in 2003, but I read it only recently and found it fascinating. It has many useful concepts for investors, which is why US investing legends Bill Miller and Bill Nygren both put it among their favourite investing books of all time.

The club’s general manager Billy Beane, and his assistant, a Harvard educated non-baseballer named Paul DePodesta, brought value investing to the world of Major League Baseball. Traditionally, teams drew talent from thousands of high schools and colleges; talent selected by professional scouts whose methods were acutely subjective. They held a general bias towards what looked good rather than what gets done, favouring anyone with the physical attributes of a stereotypical ‘great’.

Beane and DePodesta brutally strove for objectivity, seizing “upon a system of thought to make what is an inherently uncertain judgment, the future performance of a baseball player, a little less uncertain.”

The duo found that there were certain individual performance attributes that were crucial to a team’s success, attributes that were also grossly undervalued in the market for baseball players. The most important of these was the on-base percentage, which measures a batter’s ability to get to first base without getting out. No one even bothered measuring this statistic until recent decades. While other managers paid for the ability to get bat on ball, the Athletics focused on those players who were good at not getting out, regardless of whether they hit or not. The difference is significant.

A batter’s ability to get to first base revolves around knowing when to swing and, more crucially, when not to swing. If a batter had this instinct, it didn’t matter to the Athletics whether he was fat, slow, short or had the ‘wrong’ body for baseball. But for the rest of the league, who thought they could subjectively spot a great batter, these other attributes would rule him out.

At its core, Beane’s greatest talent was risk management. Like his advice to batters, his approach to acquiring new players was to focus on not striking out, rather than hitting the ball out of the park. If you don’t get out, good things tend to happen. It did wonders for the Oakland Athletics, and it’ll do the same for sharemarket investors.