Money Ball for Your Investment Strategy

Did you catch the movie Money Ball starring Brad Pitt?  If not, here’s a quick primer.

Spoiler Alert!

The premise of the movie is simple.  The Oakland A’s, a major league baseball team, has a budget of only $40 million per year.  The “big boys”—the New York Yankees, for example—have budgets that well exceed $100 million per year.  Given that set of circumstances, with the deck so stacked against them, how did the A’s ever manage to win?

They changed the rules of the game.  That’s how.

No, they didn’t change the baseball rulebook.  They changed the unwritten rules of recruiting the best players.  While most teams focused on (and paid for) athletic talent, the A’s went back to basics.  They essentially asked, “What is the fundamental premise of baseball?”  The premise is to score runs and to prevent the other team from scoring runs.  Pretty simple.

What wasn’t obvious to all the teams in baseball, however, is that factors other than athletic talent play a role in scoring runs.  For example, a particular player might not be super fast or have the best arm, but he might just find a way to get on base more often than other players, which sets him up to score a run more often than players with superior athletic ability.

How This Applies to You

Whether you know it or not, you are just like the Oakland A’s.  Actually, you’re in a far worse position, because the investment industry is full of the world’s top brainpower and financial muscle.  So how can you come out on top?  How can you win when the deck is so stacked against you?

Change the rules.

Most investment advisors suggest investing in stocks with low P/E ratio or high dividend yields, in exactly the same way that most baseball teams focus on athletic talent.  But ask yourself this: What wins the investment game?  If you score runs, you win in baseball.  If your company creates shareholder wealth, the stock price follows and your investments are winners.

It’s interesting to note that one of the best indicators of a company’s ability to produce wealth is the vested interest of the managers.  Though you’ll almost never hear the talking heads acknowledge it, managers with significant wealth tied up in their companies tend to deliver more cash to shareholders over the long-term.  This, of course, intuitively makes sense.

Warren Buffet put it best when he quoted the Bible in reference to this concept: “For where your treasure is, there will be your heart also.”

This Means Two Things for You

  1. If you’re an investor, focus on companies in which the CEO has a huge chunk of his net worth tied up in the business.
  2. It just might be the case that the best way to create shareholder wealth is to invest in yourself, in your own business, or in an enterprise that you control.  This applies even if you’re not a stock market investor.

The second observation simply goes a little deeper into the point of this article.  Managers do best when there is something on the line—when there’s something to lose.  So if you want to do your best and reach your full potential . . . put yourself out there.

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