What 'Moneyball' Teaches Us About Investing

In 2002, financial writer Michael Lewis was among the many sports fans amazed that the Oakland Athletics nearly reached the World Series -- the pinnacle of Major League Baseball.

The A’s finished the regular season with 103 wins — the same number as the New York Yankees. But the two teams couldn’t have been more different.

The A’s were a small-market team with a $44 million payroll, while the Yankees were a major-market team with $125 million at their disposal.

Lewis flew to Oakland and interviewed the A’s General Manager Billy Beane. When Lewis asked him how the team had been so successful, Beane pointed across the room at Assistant General Manager Paul DePodesta, and said, “Ask him.”

DePodesta (who inspired the “Moneyball” film’s fictional character, Peter Brand, played by Jonah Hill) explained that he’d captured every possible statistic from every MLB team going back decades.

He then used a form of regression analysis, SABRmetrics (named after the Society for Baseball Research, or SABR), to determine which singular statistic was most predictive of wins.

He found something shocking. None of baseball’s most popular statistics — batting average, home runs, runs batted in (RBI), earned run average (ERA) — mattered as much as this one single statistic: on-base percentage (OBP).

OBP refers to a hitter’s ability to get from the batter’s box to first base. That can happen via a hit, a walk or even getting hit by a pitch. DePodesta’s analysis determined that, no matter how players got to first base, the teams with the highest OBP outperformed their peers.

In 2002, Beane and DePodesta leveraged this discovery to assemble a ragtag team of OBP wizards. The ’02 A’s didn’t have much star power, but they did set a new American League record by winning 20 consecutive games, and they tied the Yankees for the best regular-season record.

Lewis compiled the story in his seminal book, “Moneyball: The Art of Winning an Unfair Game,” and Oakland’s SABRmetrics approach has since spread throughout MLB.

What does ‘Moneyball’ have to do with investing?

Many investors are looking for home run stocks — the kinds of assets that will quadruple in value in a short period of time.

But just as DePodesta determined, the problem with swinging for the fences is that you strike out a lot. In both baseball and investing, home runs are very exciting, but they’re also very rare and can be very costly.

Inexperienced investors often focus on glamour stocks — think Google, eBay or Amazon in their early days.

Companies like those follow pretty common trajectories: They soar in value 5-10x after their IPOs, then fall back to earth. Before the fall is when home run investors get interested. The true opportunity is after the initial enthusiasm dissipates.

I almost never invest in a company until it is seasoned — generally five years of quarterly reports as a public company.

I am looking for companies that have a competitive edge (a secure niche, barriers to entry for competitors), participating in a large and expanding market.

Show me fat operating margins (Microsoft at 38.5% versus Kroger at 0.87%). Give me reasons why a company’s revenue trajectory is sustainable.

In other words, I want companies that can reliably get to first base.

Like a baseball manager, I can’t predict exactly what my players will perform during the game. However, if my team bats 0.250 (gets on base every fourth at-bat) and the other team bats 0.200 (on base every fifth at-bat), on average, I am going to win.

How to find the best players

Let’s look at two very different companies: Facebook and FedEx.

Facebook is the more “glamorous” company in that it’s well-known, oft-discussed and has experienced 10x stock price growth since its 2012 IPO.

FedEx is up 4x over the same timeframe — a less glamorous rate of appreciations for a very unglamorous company. Still, I’d much rather own FedEx than Facebook.

Why? Because Facebook faces a lot of risks.

Facebook’s popularity with young people is waning, and it’s constantly in the news for reasons related to misinformation and negative health effects. None of those qualities suggest secure — much less growing — long-term viability.

FedEx is far less risky. It has a lower P/E ratio, an understandable and sustainable business model. With the world gravitating toward overnight delivery, I see a trajectory for FedEx that won’t end anytime soon.

Facebook is a home run hitter now, but its future is a big question mark. FedEx gets on base every quarter. That’s the player for me.

David Edwards is president and wealth advisor with Heron Wealth based in New York City and advises clients across the U.S. and around the world. Dustin Lowman contributed additional research for this column. At the time of publication, Edwards and/or his clients held positions in Microsoft and Federal Express.