“Baseball, it is said, is only a game. True. And the Grand Canyon is only a hole in Arizona.” – George F. Will (“Men At Work”)
It was an investment parable, in the form of a baseball game. I speak of the Oakland A’s game five loss to the Boston Red Sox in the recent American League playoffs. To most viewers, the game ended when A’s outfielder Terrence Long struck out looking, in the bottom of the ninth, with two outs.
But the game was lost long before that.
As you’ll see, the contest was decided when A’s catcher Ramon Hernandez got to first base earlier in the last inning.
Not one in a thousand baseball fans knows why his reaching first base was the poisoned dagger. But Oakland General Manager Billy Beane certainly does. And that’s why Oakland’s team manager Ken Macha will soon be fired.
I can explain this riddle. And when I do, you’ll see how this relates directly to investing. You might even begin to invest in a whole new and dramatically more profitable way.
First, if you haven’t read Michael Lewis’ fantastic book “Moneyball”, you’re missing out on a true intellectual classic. The book is a stunning account — and an explanation — of Billy Beane’s baseball dominance.
For those of you who don’t follow baseball, the Beane-led Oakland A’s have won more regular season baseball games in the last five years than any other baseball team ever before. But, even more impressively, they have done this with only the 12th-largest payroll — as one of the poorest teams in the game.
Beane’s accomplishment is similar to the track records of great value investors. He gets big results (profits) with few costs (volatility). Interestingly, too, value investors and Beane derive their edge with smart, contrarian thinking.
Value investors ignore market sentiment and what’s popular. They buy only what’s safe and cheap, no matter how ugly it might be. Beane literally does the same thing. He eschews good-looking, high-priced players with headline-grabbing batting averages. Instead, he buys rejects like the A’s set-up man Chad Bradford for pennies on the dollar.
Bradford is a pitching freak. He throws the ball underhanded. With only an 84-mile-an-hour fastball and perhaps the ugliest release in the history of the game, Bradford was on his way out of the majors when, out of nowhere, Beane picked him up and made him one of the A’s most-important players. Beane didn’t look at Bradford’s motion — he looked at his results.
Bradford’s stats showed he got hitters out more often than just about anyone else in the game. How? He releases the ball lower than anyone else. Sometimes, in fact, his knuckles literally scrape the ground. Therefore, his pitches travel a significantly shorter distance to the plate. Thus, to hitters, who are used to seeing the longer-traveling ball, Bradford’s pitches seem to be going much faster than they really are; hitters say Bradford’s fastball appears to be going near 100 mph.
Another example: Beane took an injured catcher (Scott Hatteberg) whose career was over and turned him into a starting first baseman.
And perhaps the most unusual thing about Beane is what he won’t do. Unlike every other general manager in the majors, Beane won’t draft high-school players — no matter how talented. Instead, he mostly buys experienced players who are ignored or under-appreciated because they’re fat, or slow, or look awkward when they’re playing.
Beane’s strategy is based on knowledge other general managers either don’t have or refuse to acknowledge. And it’s simply this: Outs are the most important statistic in baseball. Hitters who don’t get outs (who have a high on-base percentage) are the most important ones to own — no matter if they’re short or fat or broken in some way. Likewise, pitchers who can get outs are the best — no matter how fast or how slow they sling the meatball. Amazingly, even die-hard baseball fans typically have no idea which player statistic (on-base percentage) is most highly correlated with winning baseball teams.
Again, this is a lot like smart value investors who know that the only statistic that really matters in investing is price-to-book. Value investors don’t buy promising early stage growth companies (high-school prospects). They don’t buy expensive blue chips (all-stars). They don’t pay attention to glorified stats that have no statistical relevance to long-term results (batting average, stolen bases). Meanwhile, like baseball fans, enthusiastic investors typically have no idea which investment metrics are correlated with high future returns.
What I like so much about Beane and the world’s top value investors is that they don’t care — at all — what anyone else is doing. They know how “the world works” and can prove it, logically and empirically. Bud Selig called Oakland’s success an “aberration.” That’s the highest praise I’ve seen Beane garner yet. (When morons castigate your success, there’s no surer sign that you’re right on target.)
So . . . what does all this have to do with the last A’s vs. Red Sox game? Let me walk you through the bottom of the ninth inning and I’ll show you.
The first batter up for the A’s was Scott Hatteberg. This was fortuitous . . . because while Hatteberg’s batting average is only .253, his on-base percentage is much higher — .342. The difference is, of course, walks. According to Billy Beane, earning a walk to first base is the most valuable offensive play in all of baseball. It cannot lead to an out.
If you’re Scott Hatteberg and you know that by not swinging you have a much better chance of getting on base, what would you do? Right. You wouldn’t swing. Nevertheless, most major-league glory hounds (especially blue-chip players) dream of hitting the tying home run. They swing away regardless and end up losing a lot of games. Fortunately for the Oakland A’s, Scott is a seasoned pro and earned a walk.
Thus, the winning run came to the plate with no outs. The A’s were now in a really good position.
Jose Guillen, another well-coached player, came up to the plate. Guillen bats .311 — an impressive figure. But, again, rather than swinging, he too earned a walk, the safe play. The A’s were now in a great position. NO OUTS. Two runners on — one in scoring position. All they needed to win was a single. Or two more walks.
But . . . instead of making the smart play, as they’d done all night (and all season), Ken Macha, the A’s team manager, decided he had to “manufacture” a run. He instructed the next hitter, Eric Hernandez, to hit a sacrifice bunt toward third. It’s totally contrary to “value” baseball to intentionally earn an out. But that’s exactly what Macha did.
Imagine if Warren Buffett suddenly decided to start buying shares of Microsoft . . .
Hernandez, whose on-base percentage is an excellent .322, should have done his best to earn a walk — and, if he got the right pitch, he should have swung away. Almost any hit would have scored the tying run. Plus, even if the worst thing happened (a double-play ball), the team would still have a runner on base and the game wouldn’t be over yet. With only three outs left in the entire season, spending an out intentionally to advance a runner already in scoring position was incredibly stupid.
And what happened next proved it.
Adam Melhuse, a rookie, made a rookie mistake. He struck out looking with runners at second and third. And then Chris Singleton — a savvy pro — came to the plate. Not surprisingly, he got on base — earning a walk and loading the bases. This walk would have scored the tying run if, instead of sacrificing, Hernandez had gotten on base with a walk or a hit.
Singleton should have been a hero. Macha could have been the winning coach. And the A’s could have played the Yankees and maybe gotten to the World Series.
But that’s not what happened.
With the bases loaded, the next batter, Terrence Long, unexplainably struck out looking. Long will be remembered as the guy who cost the A’s the game. But that burden really belongs to Macha. The tying run should have already scored.
P.S. The “Billy Beane” of investing works for me. His name is Dan Ferris. He buys only what he can prove matters to investors: safe and cheap picks. In his first year at the helm of Extreme Value, he racked up better than 33% average gains — without a single strikeout (loss). If you haven’t read his newsletter yet, you’re missing the very best way I know to actually make money in stocks.