Investing Lessons from Baseball

By Matthew DiLallo - July 24, 2012 | Tickers: CROX, GMCR, JPM, NFLX, RCI | 0 Comments

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Investors can learn a lot from baseball.  There is a treasure trove of lessons from the book and movie “Moneyball.”  Not only is it important to discover how it relates to investing, but to take it to heart and be one that scores not only the advice we receive but the advice that we give.  The inspiration for the book, Oakland Athletics General Manager Billy Beane changed the way baseball teams were assembled for teams without the deep pockets to buy whatever they wanted.

As an individual investor it is easy to relate to this because we don’t have the deep pockets of Wall Street to compete on a level playing field so we need to find ways to level the field ourselves.  While Billy Beane gets a lot of the press (Brad Pitt played him in the movie!) there’s another major league GM that’s quietly building a club in a way that I think investors should take note. 

The Toronto Blue Jays GM Alex Anthopoulos has a very tough job.  His ball club plays in the same division as the storied Yankees and Red Sox whose big stars and bigger budgets are tough to compete against.  Throw in the incredibly young and talented Tampa Bay Rays and upstart Baltimore Orioles and you wonder why he even bothers.  His club isn’t the top priority of parent Rogers (NYSE: RCI) as they have shareholders to answer to more so than the team’s fans.  While the club’s current record isn’t a reflection of their future potential, it’s why they have potential that I think fans should take notice.

Alex is a man with a plan and every time he trades out a piece of his portfolio of players it is part of a larger plan.  Any time you read about a trade that he’s just pulled the trigger on you’ll hear three recurring themes:

1. The player is controllable for many years.
2. It’s a player he’s coveted for a while
3. The player has a lot of potential but his value has fallen

Control Matters

If there is one mistake investors tend to make it is being short sighted.  We all want to win now, but mortgaging your future to do so hardly ends well and the hole created takes a long time to dig out of.  Investors need to avoid short term thinking at all cost and two of the most costly involve allocation and buying on momentum instead of fundamentals.  While the banks like JPMorgan (NYSE: JPM) might be too big to fail, you are not.  JPMorgan might be able to afford trading losses of $4.4 billion dollars at their trading unit, the company was taking an outsized bet that failed and investors who over allocate can be burned up if the trade goes against them.  Likewise, investors (or really traders) who buy a stock just because it is hot while not paying heed to the price they are paying can lose a lot of money.  How many retail investors got burned by the Facebook IPO because they thought they could make a pile of money in a day only to see the stock fall sharply. 

Investors need to ensure that they are in control of their situation for the long term.  If you are investing in a stock, allocate an amount that lets you sleep at night.  Don’t use margin or buy out of the money short term options.  Acquire a company for your portfolio that you can be comfortable investing in for many years and one that outside circumstances won’t take from you.  Alex takes a long term approach when investing in and building his ball club and investors should learn that lesson well.

Build a Watch List

Every time I read about a trade Alex has orchestrated it is one involving a player he’s coveted for a long time.  He watches these players, reads scouting reports on them but doesn’t pull the trigger until the long term value outweighs the short term cost.  He’ll usually wait until a player has fallen out of favor with their current club, maybe they’re even misunderstood.  The potential is there for multi-bagger returns, but until he can acquire that player for a value he’s comfortable with just watching from the sidelines. 

Unfortunately a common mistake among investors is to be introduced to a company’s tantalizing product and buy the stock as soon as they can without paying much heed to value.  Take Crocs (NASDAQ: CROX) for instance, if you bought the company at its popularity peak you’d have lost a lot of money and still not recovered it to this day.  If you really thought the company’s product was revolutionary, there should be decades of gains ahead for the stock.  When you buy high, you need to hope there is a constant flow of those willing to buy ever higher.  By watching a company you’ll have the potential to get it for a fairer value or pass on it all together if it doesn’t pan out.

Potential Multi-Baggers Go On Sale

Again, Alex is known for watching and waiting for a player’s stock to have fallen and then he pounces.  Over the past few years he’s acquired players at a fraction of the value he’d had to have given up a year or two prior that have top-tier potential after they’d disappointed management or had a bad year.  Not all of them have panned out, yet, but he’s built a club bursting with potential without overpaying.

When you have a watch list that you check in on from time to time the potential is there for the company you covet to become available at a price worth paying.  Wait until the company has fallen out of favor with Wall Street and then acquire it when no one else wants it.  Two former darlings of Wall Street that have been multi-baggers in the past, Green Mountain Coffee Roasters (NASDAQ: GMCR) and Netflix (NASDAQ: NFLX) are both high risk, high reward companies.  However as their stock has fallen, so has the risk and at just 8.5 and 28 times earnings respectively both companies are well off their 5 year PE ratio highs of 88.5 and 73.3 times.  By building a long term watch list you have a chance to get a company you’ve always wanted to own at a price that’s not going to break the bank.

You can learn a lot about investing from baseball.  While the Jays might currently be sitting in the last place of the toughest division in baseball, they have the potential to outperform their peers for years to come.  The club’s owners at Rogers will soon be reaping the rewards of the shrewd portfolio of players that Alex is putting together.  Investors and baseball fans should take note.

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