Picking baseball players is not that different from picking stocks.
Let’s take pitcher Max Scherzer. If the $210 million star were a stock, he might be global colossus Amazon. Pricey. Unstoppable. Scherzer’s performance after he broke his nose last month brings to mind the e-commerce giant’s retreat from a New York City headquarters.
“His broken nose is like Amazon being told no by New York,” said my baseball buddy Bob Fleshner, who is a businessman and investor. “So what? Keep on rolling.”
(Amazon founder Jeff Bezos owns The Washington Post.)
A colleague who is a huge baseball fan recently asked me to advise him on buying stocks, and I told him, “Don’t.”
Buy mutual funds instead, I said. Picking stocks well enough to beat the overall market is very difficult, even for super-smart Wall Street quants who spend hours a day poring over data and staring at Bloomberg machines. I own about 10 stocks, most of which I bought more than 20 years ago because I wanted to learn about the market. I haven’t had too many stinkers, but my only home run was a company my wife picked.
Both baseball and the stock market have the big stars, the obvious “momentum” growth stocks. You buy them because everyone wants them: Facebook, Apple, Amazon, Netflix and Google-parent Alphabet. FAANG.
Baseball has its growth stocks, too. Scherzer, former Nat Bryce Harper and, to keep it close to home, pitchers Stephen Strasburg and Patrick Corbin. Everybody wants them.
Look at Strasburg, the can’t-miss pitcher. He is the Facebook of the Nationals. When he’s on, no one can touch him. Strasburg is having a career year on the mound (and he had three hits, including a home run, in his last outing), but injuries have plagued him in the past. Facebook is a cash machine, but its privacy and other issues have hurt.
“You buy Stras with the same hope and trepidation that you buy Facebook,” Fleshner said. “Both superstars. Both vulnerable.”
Then there are the value plays. The unglamorous companies that have good cash flow, a nice dividend, strong finances and that perform every day. Think JPMorgan Chase, IBM, Procter & Gamble, Exxon and Pfizer.
Howie Kendrick is an example of a Nats value stock. The 14-year veteran joined the Nationals in 2017 and is making about $4 million this year. That’s a steal considering the 35-year-old Kendrick has turned out to be the Nats’ Mr. Clutch, with a team-leading .326 batting average and 12 home runs as of July 19. Fleshner calls him Mr. Reinvention.
“He’s like IBM,” Fleshner said. “People keep forgetting about him. But he’s been around forever and doing, more or less, well the entire time. He keeps reinventing himself, as does IBM.”
None of this is original thinking. Billionaire Warren Buffett built his reputation and his fortune finding value stocks. Nearly 100 years ago, Benjamin Graham and David Dodd wrote a seminal book on the subject and revolutionized the investing business.
On the baseball side, Michael Lewis wrote “Moneyball,” a book about the statistical search for true value in baseball players. It’s called “sabermetrics.” Chicago Cubs executive Theo Epstein is one of its foremost practitioners. Research papers have been written on it. Rotisserie baseball leagues are built on statistics.
“Picking a stock and value investing is just like picking players in baseball,” said Vitali Kalesnik, director of research in Europe for Research Affiliates. “With stocks, you want to pay a good price for a certain cash flow. The company may not be the prettiest, the shiniest or the brightest, but if it has steady cash flow and comes with a low price, you will earn more than a great superstar company.”
That can mean looking under the hood before you pay for an unglamorous stock (Buffett is known for this) or signing an outwardly humdrum player who may be a better deal than a superstar.
“Just like in baseball, you may have a great star player, but in terms of getting the runs or the pitches per day that you pay for, it may not be worth it,” Kalesnik said.
Let’s take Nationals’ second baseman Brian Dozier and Trevor Rosenthal, the relief pitcher on whom the Nats made a guaranteed $7 million bet this season.
The Nats showed lots of patience with Dozier and Rosenthal. Dozier worked out. Rosenthal didn’t.
Like big U.S. banks such as Citibank, which looked like it wouldn’t make it out of the 2008 financial crisis, Dozier started off slowly this spring before coming to life. As of July 19, Dozier had 14 home runs and a respectable 35 runs batted in. If you followed the fundamentals and Dozier’s career, his numbers said he was a warm-weather player and would blossom.
Like Kodak, the film processing giant made all-but-extinct by digital photography, Rosenthal never came back. The Nats worked with him for three months before swallowing the $7 million they owed him and releasing the right-hander in late June.
The lesson: patience.
“Value investing can go through prolonged periods of underperformance,” Kalesnik said. “It requires patience, convictions and tolerance for losses in the medium term. You have to withstand the pain. It’s not for everyone.”
I have owned Microsoft shares for more than two decades. The stock went to sleep for 10 years under former chief executive Steve Ballmer. Then it took off under the cloud strategy of his successor, Satya Nadella. (The software giant’s share price hit a new high on Friday.) Clap. Clap.
Nationals third baseman Anthony Rendon is my baseball Microsoft. He has been one of the league’s most underappreciated players for years. His contract with the Nationals is up this season, and he deserves the big bucks as well.
One thing Ben Graham espoused as part of value investing is the “cigar butt” strategy. The approach involves finding broken, unloved companies that still have value (cigar puffs) left in them. Practitioners of this style, including Buffett, became wildly successful fishing for neglected businesses.
Hedge fund manager Joel Greenblatt, who wrote the transformative “The Little Book that Beats the Market,” promoted “cheap and good companies” as an investment strategy.
“Value investing is finding undiscovered gems,” Greenblatt said. “It could be because the long-term business will be good. Or it could be that in the short term, the business is underappreciated. Both can work. I’m a Mets fan. So I am a long-term thinker.”
My cigar butt equivalents on the Nats are hard-throwing 42-year-old relief pitcher Fernando Rodney (oldest player in the league), fellow reliever Jonny Venters and versatile veteran and two-time Gold Glove Award winner Gerardo Parra.
All three are seasoned baseball guys who want to stay in the Show. Rodney has played for 11 teams, is a three-time all-star and can still throw nearly 100 miles per hour. Parra played for five teams before he was released by the San Francisco Giants in the spring. He has been hitting clutch doubles and game-winning home runs and looks to me like he has brought camaraderie to the clubhouse.
Venters, another former all-star, has had three arm surgeries and is the team’s Nintendo, the always-broken game company of the 1980s. He was comeback player of the year in 2018 and then was cut by the Braves in May. The Nats picked him up in June.
All are examples of how baseball teams cut and paste to fill gaps and get through the season.
“Coach George Allen did the same thing with a bunch of ‘old guys’ to lead the Redskins to a Super Bowl,” said Michael Farr, president of D.C. investment firm, Farr, Miller & Washington. “Experienced money managers turn to the ‘old guys,’ too, the blue chips with solid balance sheets and steady profitability.”
Finally, we’ve got the Dynamic Duo: left fielder Juan Soto and center fielder Victor Robles.
I nominate Robles as one of the high-tech disruption companies that have gone public this spring: Slack, Uber, Lyft and WeWork. Take your pick. All of them, including Robles, debuted after a highly anticipated lead-up. The starts have been bumpy. Robles gets hit by pitches more often than just about anyone else in the league. He plays with a zest that is contagious. He also nearly fainted in center field one game. Like the Slacks and Ubers, Robles is loaded with potential, but worry is always around the corner.
The unheralded Soto has been a pleasant surprise. Exciting, dynamic, improving and lots of power. Is Soto the next Airbnb?