Steve Galbraith, chief investment officer at Morgan Stanley, is a big baseball fan, with utter devotion to the Boston Red Sox. A new book out called Moneyball by Michael Lewis, fascinated him and coincidentally, his fascination was the same as mine when I read the book. It seemed to me to be more about investing than about baseball.
The tome centers on the Oakland A's who have had enormous success recently with some rather different views of how to stock players. Galbraith feels that the heart of the A's success comes from questioning conventional wisdom. In baseball terms, he says that the A's managers found that convention tended to overrate such achievements as stolen bases and batting averages while underestimating the importance of on-base percentages and walks. To the initiated, this is known as Billy Beaneball. Beane is the general manager of the A's and he looks to a player getting on base as being the most important thing. In other words, an ability to draw walks which he says are highly correlated with productivity. In other words, walks equal success.
What Beane is saying is that he doesn't give a fig about batting averages but is concerned primarily with someone getting on base and staying there. He doesn't even believe in stealing bases. He also looks back at statistics to decide if he wants a certain ball player. In fact, he won't even draft out of high school. Too young. Too inexperienced. Too greater the odds of failure. He wants college or semi-pro ball players and he reviews their stats ab initio.
Galbraith has the same feeling. "Everybody knows the bullet-tossing prom king will be a success so scouts overpay for him. Investors similarly fixating on growth rates are also often playing in a picked-over field."
Now, what this means in the financial world translates to investing. For example, what is the equivalent to a walk in financial terms? Substitute stocks for players and other teams for investors. Walks, of course, are kind of boring. They are deemed passive and therefore are grossly undervalued. Boring old valuation in finance terms. Price to earnings, price to sales, and price to book. Ho Hum!
Moneyball seems to say that baseball is a metaphor not only for life itself, but also for finance. In effect, sizzle is vastly overrated. What Galbraith calls for and I happen to agree, is a period of time that is characterized not by corked bats and corked financial statements, but walks, steak, cheap stocks. In short, those high-flying A's who have continued to make the playoffs are made up of players trading below book value. Beane's on to something.
