Unearthing hidden value in baseball and investment
The commitment of the managers who built the successful 2013 Pittsburgh Pirates baseball team to leaving no stone unturned in their hunt for hidden talent strikes a real chord with value investors
In Adopting a value approach to baseball success, we highlighted US sports journalist Travis Sawchik’s book Big Data Baseball: Math, Miracles, and the End of a 20-Year Losing Streak, which told the story of how the Pittsburgh Pirates used some distinctly value investing-oriented methods to bring an end to the longest losing streak in the history of North American professional sport.
As we explained, rather than competing with other teams to buy the biggest-hitting, most offensive – and thus most expensive – players on the market, the Pirates’ success was built on the highly contrarian approach of setting out to ensure the opposition scored fewer runs than they managed.
With its echoes in UK football of the George Graham-era chant of “One-nil to the Arsenal”, this was seen as bordering on being ‘unAmerican’.
A good individual example of the strategy was the unlikely – and initially unpopular – choice as catcher of Russell Martin, whom the Pirates’ picked out after studying reams of data on the position.
What counted against Martin for every other team was his indifferent batting record in recent years but what caught the Pirates’ eye – aside from his low price – was his exceptional skill in what is known as ‘pitch framing’.
In short, this is a kind of visual trick whereby the way the catcher positions his body as he receives a pitch can help influence the umpire to call it as a 'strike' (which is good) rather than a 'ball' (which is not).
In the previous five seasons, Martin had saved 70-odd runs through his pitch-framing – the second best record at the time – but as this was not something teams cared about, the Pirates picked him up comparatively cheaply.
There are real value investing parallels here – for example, Martin’s two-year contract cost the Pirates $17m and, because of his recent record, even that outlay provoked an outcry from fans and media alike.
What the critics had missed, however, was that simply signing Martin had improved the team by nearly 40 runs per season.
This was a very ‘deep value’ call by the Pirates – indeed, for most of the market, it was hidden.
The signing of pitcher Francisco Liriano was in a similar vein – as can be illustrated using the concept of ‘surplus value’, which is a player’s wages subtracted from their market value at the end of the season.
Taking 2013 in isolation, the Pirates paid Martin and Liriano $10.3m between them but the pair produced almost four times that – $39m – in performance value.
The Pirates went on to repeat this pattern throughout its 2013 team, using statistics to which nobody else paid any attention to unearth perfectly good players the rest of the market, with its more conventional way of sizing up potential signings, had overlooked.
As Sawchik writes: “This value was hidden – and that’s the only way the Pirates could afford it.”
Beware external research
A further value investing parallel worth highlighting is the way the Pirates shied away from using external research – in this instance, local agents.
What tends to happen when baseball team scouts hunt for talent in, say, Cuba or the Dominican Republic is they stay in their expensive hotels in the capitals and the local agents bring the players to them – thereby enabling them to showcase their talents in the best possible light.
Continuing with their contrarian thinking, however, the Pirates’ management team preferred to take control of the process.
Instead, therefore, they set out to find local talent by watching games themselves – and in so doing discovered Dominican outfielder Starling Marte, who has gone on to become a Major League Baseball ‘All-Star’ and two-time Gold Glove Award winner.
Take responsibility yourselves
This anecdote strikes a particular chord with value investors, who will recognise the commitment of fellow professionals who, rather than outsource the difficult work, were prepared to take responsibility and do it themselves.
To leave no stone unturned – visiting the places the competition tend not to go, staying in bad hotels and eating worse food – in the search for hidden talent that precisely matches your requirements.
Sawchik quotes one of the Pirates’ management team observing “sometimes conventional wisdom is right” but “sometimes it is there because it’s the way we’ve always done things”.
And he himself adds: “Going against conventional thought requires courage and conviction because, when such an unorthodox attempt fails, public criticism is intense.”
That did not stop the Pirates in 2013 and it should not stop any committed value investor at any time.
Juan Torres Rodriguez
Research Analyst, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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