Story of Moneyball
I always wanted to read the book Moneyball by Michael Lewis but I never had the chance. In exchange, I just saw the movie on Lewis’ book (nonetheless, I still intend to read the book). For those who don’t have a clue what Moneyball is all about just read the wiki page but roughly the story behind Moneyball is how a man, a baseball team general manager, with little financial resources can compete against big powerful teams with a lot of cash (i.e. Yankees and the Red Sox). The “poor” team in question was the Oakland A’s and their General Manager used some similar concepts of value investing to find players that will give him the best bang for the bucks invested and remain competitive against teams that spend three times more on payroll.
Is it only about stats?
To get the best bang for your bucks invested in players, the General Manager heavily relied on stats (more than just RBI, hitting %, etc.) – in part, stats develop by Bill James. One of the goals of the GM was to line-up players with similar stats and pick the cheapest one. Hence, you get the biggest bang for your bucks. More importantly, if the player does not live up to its potential, you will limit the financial cost (similar to the margin of safety).
Here’s why money matters and why it is not only about stats
Imagine you have two or more players where the stats are almost identical. You will look for the cheapest players since you have a low salary cap. Here’s why money matters — by that I mean why spending more for someone with similar stats matters. Stats don’t incorporate all aspects of a player such as team leadership and sportsmanship. These qualitative skills tend to be incorporated into the salary some GM is willing to give to player – which are significant to win baseball playoffs games. So, if a GM selects the cheapest player among those with the identical stats, he is neglecting the qualitative aspect of a player and its unpredictable consequences (i.e. there are some players that carry with them a trouble-maker reputation).
The bottom line is that the more money you have, greater the possibility to invest more on a player with qualitative or even tacit skills that is hard to quantify but how crucial in order to win championships. Don’t get me wrong, the stats of a player is fundamental and I think what the GM in Moneyball did was brilliant but if he had more money to shop around he would have been able to pay extra for players with more qualitative skill. Nonetheless, the stats determine the price floor (i.e. the player that cost the less given the identical stats with other players is the price floor).