We always think of business as being a numbers game. However, numbers apply to almost anything, especially sports. In football, Bill Walsh developed a system that resulted in scoring more points and reduced risk by limiting turnovers. In baseball, Billy Beane used statistics to find undervalued players to fit his team’s tight budget. This shows that you can find an arbitrage and increase efficiency in almost anything.
Michael Lewis, a financial writer, wrote two great books on applying numbers in sports. The first was Moneyball. In this book, Lewis uncovered how batting average was a statistic that was over used. This has traditionally been the biggest statistic in which a player’s performance would be judged. Billy Beane, having to replace key players that left the team for more money, had to find a way to maintain production (scoring runs) without these major stars. He found that batting average wasn’t a perfect indicator as to how many runs a team would score. Of course, the higher the batting average, the better in general. But, there were other stats that did the job more accurately.
The key point here is that slugging percentage, walks, and on-base percentage are better metrics than batting average at estimating runs scored. However, the market (other teams), were using batting average as their key metric. This created enormous opportunities in the marketplace. Baseball has long been a game of tradition. And those working within the game were reluctant to change. This included everyone from owners to general managers and coaches. Billy Beane was able to replace stars with low budget players while the team kept winning.
In the investing world, we see examples of this all the time. Quarterly and annual earnings are an over used statistic, not to mention the fact that they’re also heavily manipulated. Also, there are those who only buy securities based on recent price performance. Stocks that have been going up generally attract more buyers. We’ve seen Benjamin Graham and Warren Buffet take advantage of these arbitrage opportunities by separating the real value of the company from the price of the stock. They care more about the business’s fundamentals than the stock.
In The Blind Side, Michael Lewis described the evolution of football over the last few decades. When Bill Walsh took over the San Francisco 49ers in 1979, he revolutionized the game. He introduced an offense that consisted of shorter passes. Not only did this new offense score more points, it also reduced risk. Shorter passes get intercepted less often. Plus, the quarterback gets rid of the ball quickly which reduces the likelihood of getting sacked. Replacing the traditional approach with higher percentage plays, Bill Walsh would win 3 Super Bowls.
Sports is a numbers game just like any other business. We can learn quite a bit from the competitive world of sports. The first is that most people favor the traditional ways of doing things which creates opportunity for you. The second thing is that we should always strive to maximize productivity while reducing risk. Many games are won or lost based on how many mistakes were made.