Forum Archive Index - October 2003

["winner69 ." <wwinner69@hotmail.com>]

That incredulous tirade from Morgy about Snoopy is reflected in this piece 
from the dailyreckoning.com I came across.

Something that site doesn't normal have but well worth a read.

Maybe Snoopy 'the hobby investor with linited skills' (quote Morgy) is the 
Billy Beane equivalent of the NZ investing scheme while Morgy is alike the 
also rans .............

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How Baseball Games Are Won... And Fortunes Made Investing
Porter Stansberry

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 actually decided when A's catcher, Ramon 
Hernandez, got to first base earlier in the last inning.

Not one in a thousand baseball fans know why Hernandez reaching first base 
was the poisoned dagger. But the Oakland A's General Manager, Billy Beane, 
certainly does. And that's why the Oakland A'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.

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 did this with only the 
12th largest payroll -- 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 for pennies on the 
dollar, like the A's set-up man, Chad Bradford.

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 scrap the ground. Therefore 
Bradford's 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 (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 out (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 what player 
statistic (on-base percentage) is most highly correlated with winning 
baseball teams.

Again, this is a lot like smart value investors who know 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 they can prove it, logically and empirically. Bud Selig 
called the A's success an "aberration." That's the highest praise I've seen 
Beane garner yet: when morons castigate your success, there's no more sure 
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 percentage 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 homerun. They swing away 
regardless and end up losing a lot of games. Fortunately for the Oakland 
A's, Scott is a seasoned pro, and he 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 better 
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)...the A's team manager decided he had to "manufacturer" a run. He 
instructed the next hitter, Ramon Hernandez, to hit a sacrifice bunt towards 
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 happens next proved it...

Adam Melhuse, a rookie, made a rookie mistake. He struck out looking with 
runners at second and third base. 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.

Regards,

Porter Stansberry

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 strike out (loss). If you haven't read his 
newsletter yet, you're missing the very best way I know to actually make 
money in stocks. Click below to read more:

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