5 "Moneyball" Lessons for Investors
I didn’t start reading Michael Lewis’s Moneyball for stock market advice. I just wanted a good read during the battle with middle-age bulge I wage every morning on the cross-trainer. But I hadn’t even made it through the introduction before I started comparing the strategies of Oakland Athletics general manager Billy Beane with those of the wisest investors I’ve encountered over the years. These lessons are worth sharing.
Don’t believe your eyes. Baseball, like investing, can so stir your emotions that perception belies reality. Watch a player slug a couple of home runs and you may believe he’s a star. You may not notice that he reaches base barely more than one-fourth of the time. Investors are likely to react similarly to hot stocks and funds. Before you invest in a company because, say, it knocked the cover off the ball with its last earnings report, check the longer-term record to see how regularly those long balls occur.
Capitalize on inefficiencies. When the cognoscenti see a flaw in a player—say, a pitcher’s unusual throwing motion or an injury that affects the player’s throwing (but not his hitting)—they’ll tend to knock down his value. So it is with stock picking. When investors detect a problem at a company, they’ll knock down the price of its stock. Beane would dig into the numbers to find players he liked. He’d then put them on a wish list and pick them up when the market discounted the player’s value because something was amiss. What Beane did was the baseball equivalent of what Warren Buffett does: Buy good companies when they’re cheap and out of favor.
Don’t watch the game. When the A’s were on the field, Beane went to the gym. He feared that he’d do something rash if he saw his players or coaches make mistakes. That’s a wise approach for most investors, too, especially if you’re likely to react to market volatility. There’s no need to look at your accounts daily. You need to look at your investments maybe once a quarter or once a year. Otherwise, find something else to do. Go to work. Volunteer. Play catch. Read a book. Take the kids to a movie. Just don’t sit by your computer screen and watch your stocks on a bad day. Obsessing over your portfolio is likely to cause you to act in a way that you’ll regret later.
One game is not a season. The A’s calculated the number of games they had to win to reach the playoffs. They recognized that with their low-cost roster, they were not going to win them all. Neither will you. But if you win with more than half of your investments—and don’t take a bath on your failures—you’ll be ahead of the game in the end.
Experience reduces risk. People like to invest in initial public offerings because they figure they can make big money fast by betting on a dream. But the younger the company, the shorter the track record and the more likely it is to fail. The same holds true in baseball. A kid drafted out of high school stands little chance of making it to the big leagues. Beane considered college players a safer bet because they have more experience. Similarly, the longer a company’s history, the better investors can see how it has managed through good times and bad. That reduces the risk that you’ll lose everything on a stock—the kind of setback that can wreck your entire season.
New purchase. A final (unrelated) note: I picked up shares of Seagate Technology (symbol STX), which we wrote about a few months ago (see An Old Tech Lion Roars Back). I paid $23.12 per share and am delighted to report that an announcement of strong second-quarter earnings caused the stock to soar 31% in just a few weeks. With the purchase, my portfolio is now fully invested in stocks.