Beyond the Obvious

Michael Flack

I JUST FINISHED rereading a book every serious investor needs to reread: Moneyball: The Art of Winning an Unfair Game. It was written by Michael Lewis in 2003, but it’s still quite relevant to baseball—and to investing.

It’s the story of the Oakland A’s general manager, Billy Beane, and his struggle to create a competitive baseball team on a limited budget. How does this relate to personal finance? Well, first let me explain my connection to Moneyball.

It was a time long ago, meaning the 1970s. Due to then-limited technology, a baseball player’s batting average was displayed on television only during his first at-bat. I have a distinct memory of watching a New York Mets game and asking my father, “What’s a batting average?”

He patiently explained that it was basically the number of hits divided by the number of at-bats, and that it didn’t include walks. I remember thinking that math may be more useful than I thought and… why weren’t walks included?

When I watched subsequent games, read the newspaper and talked with fellow fans, a player’s batting average is what everyone wanted to talk about. After all, having the highest batting average enabled a player to claim the prestigious title of batting champion.

I quickly realized that walks were incorporated into another number, the on-base percentage. This number is basically the number of times a batter safely reached first base divided by the number of plate appearances.

As there were many players skilled at obtaining walks, a player’s on-base percentage could be significantly higher than his batting average. And because a walk was as good as a single, I realized that a player’s on-base percentage was a much better indicator of a player’s worth than his batting average.

For instance, in the 1970s, there was a coach on the Mets named Eddie Yost. As a player during the 1940s and ‘50s, he walked so much that his nickname was “The Walking Man.” His on-base percentage was a fantastic .3940, meaning he reached first in nearly four out of every 10 plate appearances. That’s the 87th highest of all time, well ahead of Hall of Famers Willie Mays (.3836), Ken Griffey Jr. (.3695), Johnny Bench (.3416) and Cal Ripken Jr. (.3402). Since Yost’s lifetime batting average was a modest .254, few know of him today.

On-base percentage plays a significant role in the book Moneyball. There’s a key scene where Billy Beane’s scouts encourage him to draft prospects based on phrases such as “good body, big arm,” “the guy has a cannon” and “he’s noticeable.” It’s said of the best prospects that “he’s a tools guy,” meaning he has all five tools—he could run, throw, field, hit, and hit with power.

Later in the book, when current major league ballplayers are analyzed, everyone but Beane wants to talk about their batting average. It was common knowledge among managers, scouts, writers and fans that the number of runs a team scored was directly related to a team’s batting average.

An exasperated Beane states that all these metrics are dated and well-known by every other team in baseball. If Oakland wants to win on its tight budget, it’ll need to think differently and start using other metrics, especially on-base percentage, in evaluating which players to sign. He also knew—through nascent baseball analytics—that both his scouts’ recommendations and batting average did not equal runs, but that on-base percentage did.

His scouts were not impressed. Beane pushed ahead anyway and built a winning team on a limited budget based in large part on focusing on a player’s on-base percentage. When I read the book, I thought, “Hey, that should be me.”

What does all of this have to do with personal finance?

If you think you can improve on the market’s risk and reward by investing in individual securities and, in effect, beat the market, that’s fine. I think it may be possible. Hard work can overcome many obstacles.

You’re doomed to failure, though, if you apply all that hard work to using dated and well-known metrics such as dividend yield, price-to-earnings, price-to-sales, beta and so on. When investing, they’re the equivalent of the “tools guy” and the batting average—terms still quoted on television, online and by fellow investing fans, but essentially useless because such information is already reflected in today’s stock prices. Old habits die hard. Wikipedia still displays batting average under a player’s “MLB Statistics,” but makes no mention of on-base percentage.

Oh, by the way, now that everyone in baseball knows about on-base percentage, Beane has found it has become much less useful in finding undervalued players.

Can the market be beaten? Offer your thoughts in HumbleDollar’s Voices section.

Michael Flack blogs at He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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