I like watching NFL Football because of the strategy involved. This includes many variables of players, formations, and plays. Together, their goal is to move the ball to the 100 yard line. This is how they put points on the board. In some ways, value investing can be viewed as a simpler four step process, thanks to Warren Buffett. He said: “Charlie and I look for companies that have (1) a business we understand; (2) favorable long-term economics; (3) able and trustworthy management; and (4) a sensible price tag.”
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Sports & Stocks by Bud Labitan
Understand that winning Football comes down to deciding on a run play, a pass play, or a kick. In Value Investing, I try to keep it simple by first trying to understand a business and its products and services. Second, I try to understand whether this business in front of me has something special. Is it special enough to win repeat customers? We want to see something so special that the business is hard to copy or replace. Thirdly, like Football, does it have able and trustworthy managers and coaches.
For a moment, imagine you are the ball carrier and decision maker. What should you do? Survey the field of businesses and look for profitable opportunities. Look for reliable businesses that have a history of producing extra cash in good times as well as economic bad times. We call this extra cash, FCF, Free Cash Flow. Like a receiver who is wide open, look for a business with minimal competition. Think of Debt as a bit of extra fat and weight on a swift runner. It slows us down. We want strong muscles and a practiced set of skills.
We all like to stay within our budgets. However, the sports industry is different from value investing when it comes to bargain seeking. Can the team, coach, players, or business be purchased at a reasonable price? This is difficult. Many sports teams are under pressure to produce winning teams every year. They are forced to pay premium prices when competing for a small number of great players. This is a reflection of the law of supply and demand. However, sometimes a strong team can be built by hiring a good combination of good players. An example of this is the Oakland Athletics Baseball team. The Oakland A’s reached the playoffs in four consecutive years from 2000 through 2003.
Moneyball: The Art of Winning an Unfair Game by Michael Lewis is a book (and movie) about the Oakland Athletics baseball team and its general manager Billy Beane. Beane and statistician Paul DePodesta used sabermetric principles to run the team in a cost-effective way.
Sabermetrics was pioneered by Bill James. It includes methods to collect and summarize data from in-game activity to answer specific questions. The term is derived from the acronym SABR, the Society for American Baseball Research, founded in 1971.
In 2002, the Athletics became the first team in the 100 plus years of American League baseball to win 20 consecutive games. Despite Oakland A's low revenue, the team’s analytical, evidence-based sabermetrics approach was used to assemble a winning low budget team. Other low payroll teams, such as the 2003 World Champion Florida Marlins and the 2008 American League Champion Tampa Bay Rays, have competed in the World Series.
Investing is competitive. Can we buy a high quality stock at a bargain price? First, make sure that our target stock is a piece of a high quality first-class business. In Value Investing we are not under the time and pricing pressure of sports teams. We have more time to evaluate our options. When these four investing filters are present, there is a higher probability of success.
One of my favorite quotes by Charlie Munger is very useful: "If you're going to be an investor, you're going to make some investments where you don't have all the experience you need. But if you keep trying to get a little better over time, you'll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work and practice. It's like playing golf -- you have to work on it."
Golf? We can talk about golf later when discussing our mental game. Let’s get back to football for a moment and talk about defense. A good defensive strategy helps to prevent a loss. The role of the defense is to prevent the offense from scoring by tackling the ball carrier or by forcing turnovers (interceptions or fumbles). In investing, defense is acting to prevent the loss of your money. This is done by filtering out all the weak businesses.
We can filter out the weaker businesses by buying only the ones with great long-term economics. We want to invest in businesses that have something special, sometimes called a Moat. A Moat is the strong defensive water barrier that kings built around their castles. In investing, a Moat is a sustainable or enduring competitive advantage. Think Brands!
Next, buy only the stock of a business with able and trustworthy management. Some may be able. But, if they are not trustworthy, they will steal from you.
Here is another way Warren Buffett talks about his formula: “When buying companies or common stocks, we look for understandable first-class businesses, with enduring competitive advantages, accompanied by first class managements, available at a bargain price.” Look for those kinds of businesses.
In Football, the New England Patriots have won 5 Super Bowl Championships. They have done this with variations of good offense, defense, and special teams. They have also had great players, coaches, and management. Let’s also give credit to their enthusiastic fan base. In 1985, the Chicago Bears had such a team, and won that year’s Super Bowl. Interestingly, the team they defeated that year was the New England Patriots.
The special teams unit in Football is responsible for all kicking plays. The special teams unit of the team in control of the ball try and execute field goal (FG) attempts, punts and kickoffs, while the opposing team's unit will aim to block or return them. In investing, I think of the special teams as special situations like activist value investing.
In Activist Value Investing, an individual or group, purchases large numbers of a public company's shares and often tries to obtain seats on the company's board. Their goal is to cause a change in the company’s business. A company can become a target for activist investors if it is mismanaged, has excessive costs, or it could be run more profitably as a private company. The activist investors believe they can fix and make the company more valuable.
But, think, are they making the core business more valuable? This is riskier than the four filter steps I mentioned. However, sometimes their