The Hidden Investing Wisdom in Moneyball

Moneyball isn’t just one of my favourite books; but it’s also one of my favourite investing books.

That might sound odd, so let me explain.

For those of you who aren’t aware, Moneyball is about the early-2000s Oakland A’s, a small-market MLB team that just didn’t generate the revenue needed to spend aggressively on star players. Lead by GM Billy Beane, the front office embraced a different approach — something no other team was doing.

Some of the more unusual things Oakland did included:

• Placing more value on statistics rather than the opinions of managers, coaches, or scouts

• With an emphasis on the right statistics (on base percentage) rather than ones that are more flawed (batting average, runs batted in)

• They were willing to bet on aging superstars who were available for cheap

• While avoiding the long, expensive contracts teams would regularly give out to excellent players

The strategy worked. The A’s were arguably the best team in the American League during the 2001-04 period, including running off a then-record 20 game winning streak in 2002. The team reached the playoffs in 2001, 2002, and 2003, but failed to reach the World Series.

Most of you are probably familiar with the movie over the book, but I highly encourage you to read the book. It’s fantastic.

Today on the newsletter, let’s delve into how the book helped me become a better investor, and how a concept from Billy Beane’s philosophy can help with replacing a certain dividend stock that’s about to be acquired.

Moneyball as an investment book

Moneyball seems like it’s about baseball, but the book is more complicated than that. What it really covers is how to look outside of the box.

The Oakland A’s couldn’t outspend their rivals. So they focused on different attributes than everybody else. The result was a roster full of imperfect baseball players that all served a specific role.

In short, it’s value investing — baseball style. Oakland was looking for unloved players (securities) that offered the ability to exceed expectations (beat the market), a combination that would deliver a winning team (a comfortable retirement/financial independence).

That’s the beauty of Moneyball. It teaches you to think outside of the box.

Using the powerful lessons from the book, I realized a few things.

One thing the philosophy taught me was the importance of statistics. As a dividend investor, two important statistics stand out. The first is a company’s ability to beat the market over time, something that is proven when we look back at their long-term results. And secondly, I want a company that pays a steadily improving dividend as it does.

Moneyball wanted on base percentage and slugging, and eschewed runs batted in and stolen bases. The former were important. They were the statistics that mattered. So Beane focused on those ones.

I’m doing the same thing by focusing on companies that have performed well while increasing their dividend. Those are the statistics that matter to me. 

But I took it a step further, and I really only get excited about those companies when they’re trading at 52-week lows. Such a scenario allows me to buy a superstar, but at a discounted price.

It’s akin to the A’s picking up the corpse of David Justice for the 2002 season. After being a perennial all-star for a decade, Justice was coming off a lackluster campaign. The pundits thought he was finished, and the A’s were able get the Yankees to pay much of his contract. He had a fine season, and helped the team make the playoffs.

The same thing happened in 2006. Virtually every baseball commentator thought aging superstar Frank Thomas was washed up. He was coming off an injury-plagued season where he only appeared in 34 games and batted a mere .219. Oakland signed him on the cheap and he bombed 39 home runs in an A’s uniform that year. He was the team’s best bat, and lead the team to the American League Championship Series.

Both Justice and Thomas were risks when the A’s signed them, but Beane was comforted by the years of statistics behind both players. Both players had a demonstrated history of being really good at baseball. The bet was both would continue that trend, and it was made using a small fraction of the team’s payroll.

The concept is even more powerful for stocks that it is for baseball players. Eventually, a ball player will age and his abilities will decline. Father time always wins here, it’s only a matter of time. But a company can shake off a bad year and thrive for decades after.

How can an investor tell if a stock fits the criteria? It’s very simple. All I’m really looking for is a handful of things:

1. Has it performed well over time?

2. Does it have a history of dividend growth?

3. Is it trading at or near a 52-week low?

4. Are there countless bears on Twitter/Seeking Alpha/wherever bashing the stock?

If the answer to all of those are yes, it’s time to start looking. 

I’ll finish this section with a couple examples of stocks that have done well after checking off all those boxes. Just last year, everybody was bashing TD Bank (TSX:TD), saying the money laundering scandal in the United States was going to haunt the stock for years, and possibly even a decade. I wrote about how I believed the company would bounce back, and it has.

It’s less than a year later, and the stock is already up more than 30%.

Another example? Okay.

In October 2023 I posted on Twitter that I’d be extremely excited to buy Coca-Cola (NYSE:KO) if it dropped to a 4% yield. The stock was trading at a multi-year low and the dividend yield was about 3.6%. Basically, I was saying that I’d aggressively buy if the stock fell another 10% from there.

Alas, it was not to be, and I missed out on that one. I should’ve bought when it was cheap, rather than waiting for it to become ridiculously cheap.

By the way, Coca-Cola is also up nicely from that post.

And although I missed out on Coca-Cola, I didn’t miss out with another Coke-esque stock recently became cheap. I bought it, and I think I might buy some more soon.

“We create him in the aggregate”

In the Moneyball movie there’s a terrific scene where Billy Beane (played by Brad Pitt) discusses how the team is going to replace their superstar slugger Jason Giambi, who had just departed for the New York Yankees landing a massive contract in the process.

“Billy, we’ve got 38 home runs, 120 RBIs we’ve gotta make up.”
“Guys, you’re still trying to replace Giambi. I told you, we can’t do it. We can’t do it. Now what we might be able to do is recreate him. We create him in the aggregate.”

Beane’s strategy was to replace Giambi — and two other departing players — with undervalued players that would produce the same aggregate on base percentage. So he brought in Scott Hatteberg (played by a young Chris Pratt in the movie), and Jeremy Giambi to help fill the void. Yes, Jason’s brother.

It was effective, and the A’s didn’t feel Jason Giambi’s loss all that much.

The investing parallel of this situation has to do with First National Financial (TSX:FN). This company has long been one of my favourites. It has a clear moat. It has a capital-lite operating structure. It steadily increased earnings over time. And it paid one of the more generous dividends you’ll find on the TSX.

Oh, and if that wasn’t enough, it also paid pretty consistent special dividends. Every December, almost like clockwork.

I wrote more about it here if you’re interested.

Unfortunately for all us First National bulls, the stock is about to be acquired. The company announced on Monday that it had accepted a $48 per share bid from Brookfield and Birch Partners. The deal is supported by First National’s two largest shareholders. Together, Stephen Smith and Morey Tawse own more than 70% of shares. That makes it all but a done deal.

Many of you tagged me on Twitter, DM’ed, or texted me with one simple question. “How can I replace the terrific combination of yield and growth that First National delivers?”

To be honest, I’m not sure you can. I have some ideas — which I shared with premium subscribers on Friday — but there really isn’t some magic bullet here.

In short, it’s kind of like replacing Jason Giambi.

But what we can try and do is replace it in the aggregate.

First National shares had an average yield in the 5-6% range for years, excluding the special dividends. But the special part was the dividend growth that went along with that. A 6% yield with 5% annual dividend growth was a nice combination.

We can get pretty close to replacing that with a selection of stocks. For example, we could do:

• An 8% yield with 2% growth

• A 4% yield with 10% growth

That would give us an average 6% yield with 6% growth

Or, we could get close by using a combination of:

• A 6% yield with 4% growth

• A 5% yield with 6% growth

That gets us to a 5.5% yield with 5% growth, which is pretty close.

Unfortunately, finding stocks that offer those combinations isn’t easy. The market is just too expensive, and dividend yields are low. So perhaps the move is to simply take your cash, collect 2-3% on it for a little while, and look at redeploying it when valuations make sense again.

There are cheap stocks in Canada that do check off the yield/growth boxes, but they are becoming few and far between. Our banks and life insurers don’t qualify, since they’re almost all trading for 52-week highs. But there are cheap telecoms out there — especially BCE (TSX:BCE) and Telus (TSX:T). There are a few REITs that are still reasonably valued, too. And there are always cheap small-cap stocks out there. Some, like our old friend Algoma Central (TSX:ALC) still offer yields of nearly 5%, plus the potential for dividend growth.

So these stocks exist, but I sure miss the days of 2023 when cheap Canadian stocks were everywhere.

The bottom line

Moneyball is a great book because it shows exactly how one man thought outside of the box and managed to win an unfair game doing so.

Read it. It’ll help you become a better investor.

Although most teams now employ similar Moneyball strategies as the A’s did in the early-2000s, there’s still value there. Teams are constantly figuring out ways to get an edge compared to their competition, and you can do the same with investing. In fact, I think it might even be easier in the investing world than the sports world. So much of investing is emotion-driven, while sports can attract some of the best minds out there.

That way of thinking changed the way I invest. Maybe it’ll do something similar for you.