Value Investing Lessons from Moneyball

Is baseball a metaphor for life, as many literati have suggested, or for value investing?  Michael Lewis’ 2003 bestseller Moneyball argues the latter.  More recently, the book has been adapted by screenwriters Steven Zaillian (Schindler’s List) and Aaron Sorkin to make a thoughtful movie that will be of special interest to investors who believe in trying to find hidden bargains.

Moneyball focuses on the 2002 season of the Oakland Athletics, a team with one of the smallest budgets in baseball.  At the time, the A’s had just lost three of their star players – Jason Giambi, Johnny Damon, and Jason Isringhausen – to free agency because they could not afford to keep them. 

Billy Beane, the team’s general manager, was a former ballplayer of great promise but modest accomplishments, and he knew from his own experience that players do not always perform as conventional evaluation might suggest.  Beane latched on to the statistical work of Bill James of the Society for American Baseball Research (SABR, hence “sabermetrics,” the science of baseball) as a possible remedy for the team’s woes.  He identified a young Harvard graduate and Cleveland Indians analyst, Paul DePodesta (called “Peter Brand” and a Yale man in the movie), as an expert on sabermetrics, hiring him as assistant general manager.

DePodesta’s method is to decompose a player’s statistical history into its elemental parts, such as the frequency with which he hits the ball into a particular part of the field with runners on base.  Using such logic, he argues that the gifted Giambi can be replaced by parts of three new players, acquired on the cheap.  Accentuating the importance of this kind of analysis is the fact that Beane has very little money, by major league standards, with which to pay players.