Does Moneyball Give a Gliimpse of How to One Up Wall Street?

I realize that not everyone is a reader. When I interviewed the famed British illustrator Ralph Steadman (think of Hunter Thompson's Fear and Loathing in Las Vegas for example), I mentioned that I had started as an artist and became a writer. He replied that he started as a writer and became an artist, "because no one reads anymore."

Near two decades have passed, and the readers of this world still love their books. Many of us have not only read 50 or a hundred books a year most of our lives, but we've read many of those books more than once and as many as four or five times possibly.

I bring this up because I am currently reading, for the second time, Michael Lewis' Moneyball. After my first reading it was made into a movie starring Brad Pitt and Philip Seymour Hoffman. Now, near 20 years later, I am seeing it with new eyes, not as a baseball fan but from the point of view of an investor. 

The book is about how baseball historically came to place value on certain factors that statistics actually proved were backwards. Billy Bean, who had been drafted as a most-likely-to-succeed superstar, is at the center of this story about the Oakland Athletics. Bean is GM, the decision maker regarding the makeup of the team. His experience as a failed potential superstar gave him an insight into the game that most front office folks could never recognize. 

How this applies to investing is obvious. The conventional wisdom is that the prices of stocks (which represent partial ownership of companies) are fairly valued by the market. That is, if the price of one share of a company is seventeen dollars, the company's true value will generally correspond with that in the aggregate of all its shares. Or more correctly, the price of a share will correspond to the future earnings based on risks and potential rewards.

If this is so, how then does a bridge player  from Omaha do so phenomenally better than a majority of others when purchasing portions of company's shares? How does he succeed where others fail? 

It may be like the story in Moneyball. Conventional wisdom is safe but backwards. Warren Buffet made a name for himself by (a) doing more homework than the herd, and (b) by using a different set of measurement tools.

I like the illustration of the herd because it corresponds to life as a zebra on the Serengeti. There is safety in the herd. The reason is that to leave the herd is to become vulnerable to the lions. 

The problem for the zebra in the herd, though, is that the grass gets shorter and shorter. Outside the cluster of zebras in the herd there is ample food, but how retrieve it and enjoy it without risk of become food oneself? 

Somehow Warren Buffet is getting outside the herd and avoiding the lions as well. How he does this is not my point. The point is that there are opportunities available by shucking off conventional wisdom. This is what Billy Bean did because he saw with great clarity how wrong the "experts" were about him.

I once published an article titled "Who Are Your Experts?" in which I challenge people to think for themselves, or at least recognize that when choosing experts you are ultimately responsible for the choices you make. 

Desert Storm was another example of how the conventional wisdom was wrong. Experts were saying that we were about to enter a protracted war with Saddam Hussein that would end up as another Vietnam. Instead, Iraq capitulated in 100 hours. (This was Desert Storm under George Herbert Walker Bush.) There were many lessons for both businesses and investors from that brief war.

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The subtitle of Moneyball is, The Art of Winning an Unfair Game. Wall Street, which Michael Lewis has also written about in the past, is also considered by many to be an unfair game. Can the lessons Billy Bean learned about player valuations be transferred to the Street? 

To some extent it may be possible. When everyone loves a stock because of the personality of its leader or for any other reason trotted out by the media, it valuation goes up, and likely exceeds its real value. The diamonds in the rough, like some of the players with apparent flaws -- a pitcher with a quirky delivery, for example -- may be neglected and undervalued, until someone notices that they have been consistently making a boatload of money for years, and with no end in sight.

All decisions involve weighing risks and rewards, and learning how to identify what has real value and what only has the illusion of value. Be wise.