Tom Gardner of The Motley Fool recently conducted an exclusive five-part interview with Michael Lewis, author of the best-selling Moneyball. The interview is a must-read for investors and baseball fans.
Some call it the best business book out there. Michael Lewis is the author of the best-selling Moneyball, a look into the roaring success the Oakland A's baseball team has achieved recently through contrary thinking and unconventional means.
Part I: Moneyball's Home Run Insights
Michael Lewis: Well, Moneyball is about how the Oakland A's, on a low budget, win so many baseball games. The way they've done it is by finding value in players that other people have overlooked. And the way they do that is actually rather complicated. It involves a sophisticated and, in some cases, original use of baseball statistics to measure a player's performance. What they've had to do in Oakland, out of economic necessity since they are a small-market team, is to question all the traditional statistics that get used to evaluate players. They've challenged the traditional measures, asking if they really are a good way to measure what a particular guy brings to a team and how much he contributes to winning.
* * *
Believe it or not, the answer in most cases is "no" -- traditional measures are not very accurate. It turns out that you can find much better ways to measure value, if you approach the game unconventionally. And once you've done that, you can find value that other people haven't.
Part II: Don't Listen to Buffett
Lewis: Here's an example. Bill James, all the way back in the early 1970s, starts asking questions about baseball statistics. He stumbles upon something like errors. Errors are used to measure whether a player is a good or bad defensive player. And James comes up with the radical notion that the errors statistic is complete baloney. Teams are judging all of their fielders by a system that is flawed. They're deciding who is a good defensive player on the basis of what a scorekeeper says is an error (a player mishandling a ball). But James forced everyone to ask: What is the easiest way to never get any errors? Just don't get to any balls. You can't mishandle any then! And anyone who does that is clearly a bad defensive player... someone who is too slow to even get to many balls. So he concludes that this clearly is an area where we need to rethink things.
* * *
Part III: Embrace the Unloved
Lewis: In baseball, people were told for generations that batting average was what was really important. Well, it turns out that when you actually ran historical studies to determine what correlated highly with a team's run totals, batting average was very low on the list. Imagine that! And that's because you have these teams that have high batting averages who never get on base with walks and who don't hit for power. Compared to a team that had a lower batting average but walked a whole lot and hit home runs, they weren't on base as much so they weren't scoring as much. A fetish was made of the wrong number. It's been that way for decades in baseball and persists even today. And this created a huge opportunity for the Oakland A's.
* * *
Part IV: Finding Baseball and Stock Opportunities
Lewis: The market in baseball players is actually getting more sophisticated pretty rapidly and so now what they are doing, they are almost short-term arbitrageurs. They are seeing that the market jumps around and the opportunities aren't as big as they once were. There are smaller opportunities that they have to fight to exploit. It feels like they are less Warren Buffett today and more John Meriwether. They're looking for a short-term mispricing of left-handed relievers or a short-term mispricing of outfield defense. That kind of stuff.
* * *
...But, having said that, the single biggest opportunity for someone running a baseball team is that black hole of misunderstanding surrounding amateur baseball players. If you can go out and find the guys who are in college or in high school who will be successful major league baseball players, you will have a dynasty like none that's ever been seen before because of the way baseball is structured. You will own all of the best players for the first six years of their big league careers. Yet nobody has figured out how to do it. This is the biggest opportunity out there. It's the mother of all inefficiencies in baseball.
Part V: Moneyball's Undervalued Players
Lewis: This thing, baseball, has been going on for 100 years in full view. Everyone thinks they know it. And Bill James is a night watchman at a Stokely Van Camp's pork and bean factory who has no real background in math, in statistics. He's an English major who just starts to think and discovers the joy of rethinking conventional assumptions. And in doing it, he revolutionizes the entire sport. That is an incredible story.