Moneyball - what's Baseball got to do with Investing?

sammy11 · November 28, 2015, 7:39am

Many times we would be reading something or watching something or listening to something completely unrelated to investing, and sub-consciously our mind would start drawing parallels between that and what happens in the stock markets.

Recently I came across a book and movie by Michael Lewis called Moneyball. I recently read his book The Big Short (which is soon to be released as a movie) which is based on the subprime crisis. I also had heard about his first book Liar’s Poker, which is known as the Bible for Wallstreet wannabes. Therefore I was intrigued enough to download the movie Moneyball, which I watched, and also the book, which I plan to read (actually listen, since I prefer audiobooks).

Moneyball is based on baseball. There is a team (Oakland’s) which is managed by a General Manager (played by Bradd Pitt). His character is Billy Beane who was a college baseball prodigy, and who was offered a chance to play professional baseball, which he took up forgoing a full scholarship to Stanford. It seems that he was not very successful as a professional player, and soon he went into team management. His team (Oakland’s) was an average team and used to get frequently knocked out before reaching playoff’s. However, the team always used to have some star players, which used to get taken over by rival teams at higher prices, which Oakland could not afford. So, as an annual ritual, the Scouts (selectors) used to find replacements for them which they could afford. They used to start off with quantitative data (a little bit) but used to base their judgements more on qualitative factors. Bradd Pitt was not in complete agreement with this approach to selection.

Also there is a practice to swap players between teams based on requirements. For eg, if a team needs a defense player, it would bargain with a rival team and arrange to either buy out the existing contract or swap another player that the rival team wants. In one of such meetings, Bradd Pitt meets a young graduate passout from Yale who had a degree in Economics, and he is very surprised at his presence in a baseball meeting. Upon being coerced, the young graduate opens up to him and says that the method of selection of players followed by all the teams is completely wrong. Using statistics, and probabilities he shows Pitt how they can build a champion team within the resources they have. And the story is about this selection and how the team progresses. The ending has a twist so I will not give it away.

Now why did a financial author like Michael Lewis write about baseball? There are a lot of similarities between this and investing. I give below my impressions as I watched the movie.

Some of the points I didn’t agree with:

Reliance on past statistics completely – this may not work all the time in investing as one should try and be where the puck is going to be, not where it was.
Winning is all – Pitt did not play for records and believed that winning was paramount. In investing the process is as important, if not more, than the result.
Believing in Jinx – Pitt never watched games live. Yet, he went to watch the most important game against his daughter’s instructions not to jinx it. And when he went, his team started losing, and so he walked away, and they started winning again. Not strictly related to investing, but we also sometimes are susceptible to such biases.

I am sure there will be a lot more information on the net and presented in a better manner. Also, if one is interested, one can search the web for a torrent file of the movie and audio book and download it. It was time well spent for me.

varadharajanr · December 8, 2015, 11:44am

Amazing post - I have been a big believer of charlie munger’s horizontal thinking and your post got me excited.

A few points are to mull over are

if you are a disbeliever and someone else brings in data based evidence, learn to trust it
one of my biggest learnings is that the less gifted but passionate like billy beane - the extraordinarily gifted seldom make good analysts or coaches because the pieces come together so effortlessly for them
making the change and wiating for it to yield results is the tougheest part of the process - people want fruits to be borne out as soon as they water the plants. How do you assess progress without seeeing the fruits of it is something no one has figured out completely. But like ian cassel says “if you are doing better than what you were two years back, you are on track” and not necessarily doing better than your perceived competitors. That’s the tough part.

good effort !

sammy11 · January 4, 2016, 2:14am

Thanks for your appreciation Vardha. A few thoughts:

Cross functional / lateral thinking is quite difficult. One must either have varied experiences (typically through the kind of jobs that he does) or be very well read and then consciously implement these learnings. The former is a little simpler as implementing comes a more easily if you have already experienced it, rather than if you just have vicarious knowledge.

I was listening to Google’s Sundar Pichai recently, and he said that (I am paraphrasing here, not verbatim) Google’s strength was the varied educational backgrounds that its employees came from. History majors, Art majors, Law graduates etc. A major portion of the employees do not have a Computer Science background. And that is a saying a lot for a “technology” company. (On a side note - I started wondering if I could apply, with my finance background. Would love to work there). Google seems to be managing as a company what Charlie Munger did as in individual.

One thing I didnt state separately above was Conviction. Billy spotted a talent (the Economics graduate), he got convinced of the theory, and he backed it up to the hilt, although there was no past data/experience to indicate that it could work. How many times do we as investors like a “story”, can see how it could pan out (not clearly at first), but dont have the confidence in our “seeing” ability to hold on till it unfolds completely.

I believe that Profits = Conviction, and then it increases exponentially, that is, if Profits increase “x” times, Conviction increases “10x” times. Although its not come out in the movie directly, I am sure Billy’s confidence in the process would have increased similarly, when he started seeing the results. Had it not performed initially, I doubt he would have stuck with it.

But then in investing, often we make the mistake of falling in love, getting blinded and finally getting hurt by our Convictions (returns getting affected by stocks that have stopped performing to their potential). For eg. a company that i own was a darling of the markets over the last 4-5 years and has given stupendous results both in the real economy as well as in the market. But its pace of growth decelerated over the last 2 years. I saw the signs over previous 4-5 quarters, but was too patient with it, and finally ended my love affair at a price today at which it was exactly a year ago.

Like they say in romance - learn to let go. If the other person loves you back, he/she will return to you. My new year resolution is to learn to let go of my sweet-hearts, and if they come back (to a certain price), I will love them again