Moneyball: A value investing parable

I don’t like baseball. My baseball career lasted for exactly one season as an outfielder in the fourth grade, wherein I suffered more blows to the head than I really care to remember (or actually can, come to think of it), and my relationship with the sport has been…uh, negative ever since. Despite all this, I really loved Moneyball.

I first saw it on Seth Klarman’s recommended reading list. I wasn’t sure about it – the subject matter obviously wasn’t my cup of tea – but I’ve enjoyed other Michael Lewis books like Liar’s Poker and The Big Short, so I figured I’d give it a whirl.

Moneyball tells the story of the Oakland Athletics, one of baseball’s poorest teams, and their unorthodox ascent to the league’s upper tier. As the title of this post suggests, the process reads like a value investing parable (and the prodigal son’s got nothing on this one). It sounds corny, but it’s true: the book is an excellent expression of the experience of value investing.

Broadly speaking it covers two areas. The first is discovering hidden gems. Value investing requires that you be willing to use metrics that others don’t – or at least use them in ways that others don’t – to find the real bargains. The A’s snagged fantastic deals by using stats that actually measure value rather than more time-honored and comfortable stats. It also means focusing on the tangible present at the expense of some hypothetical future. Lewis’ transcription of the scouts’ conversations about the “potential” lurking in young players sounds like a caricature of analysts pumping up goofy story stocks with big dreams and wild valuations.

Even more than that, the book captures a second aspect of value investing (or actually any type of investing, I suppose): feeling crazy. Making the best moves by definition means making the ones that the herd isn’t, and that in turn means sticking your neck out and risking looking like a fool. That presumably is why a lot of books on value investing start off talking about ass-covering institutional imperatives and the desire of most professionals to save face first and outperform second. Pretty much anyone who’s ever made an investment can relate to the feeling of doubting your own judgment after watching a newly-purchased investment plummet. The A’s built themselves into a great team by making moves that seemed downright bizarre to outside eyes and remaining indifferent to outside judgment. They picked guys who couldn’t have made it through most teams’ tryouts; one was was overlooked for the simple reason that teams thought he was too fat.

It sounds a little goofy to refer to Moneyball as a parable, but Michael Lewis is a pretty direct writer in my experience and here sticks to that style here. He emphasizes again and again that most teams’ strategies – and a lot of baseball wisdom – are based less on facts and more on gut feeling and truthiness. Ironically, I think it does an even better job of (indirectly) evangelizing about the principles of value investing than most books/articles by value investors. A lot of value investors take on a smug or condescending tone when describing the investment practices of the non-value masses and, let’s face it, nobody likes the feeling of being talked down to. Regardless of what Warren Buffet says, value investing isn’t a binary “inoculation” process and if you’ve ever wanted to help a misguided investor (or somebody with frustrating decision-making in general) Moneyball might be a handy under-the-radar teaching tool. I can definitely see why it appealed to Klarman.

Besides all that it’s also a fun underdog story, even for someone who isn’t enthusiastic about the sport. Billy Beane is a tremendously interesting guy who combines a wild temper and lack of personal introspection with the analytical detachment necessary to question and change how baseball was managed. The account of that change is likewise fascinating. All in all, I think that constitutes an enthusiastic thumbs up for anyone who is even vaguely interested in the themes or subject matter.

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