Using Sports to Understand Investing Numbers
I’ve talked about trying to create a series of good analogies between sports and investing before. The reason why I think it’s such a great idea is because it would open the doors to what is one of the most accessible ways for people to build long-term wealth — the stock market. But going through financial reports and wading through all those numbers that responsible investors need to look at is prohibitive. People just don’t want to learn all that stuff. What’s interesting is that a lot of these very same people already do this kind of analysis every day. Sports fans, for example, can spout off all kinds of stats on a player without realizing that this is data and they have given it meaning. When they look at box scores or a player’s stats, they don’t just see numbers, they see a story. Just by looking at the numbers, they could tell you a lot about a player or a team. Same with a company’s financial statements.
Numbers Tell a Story
When the casual sports fan reads that Adam Dunn of the Reds is hitting .237, they might think he’s a horrible player. While he has his problems (he strikes out too much and doesn’t hit for a high average), he’s really a very productive player. Have I ever seen Adam Dunn in person? Nope. But he does lead the majors in walks, which gives him a nice .389 OBP. He’s also tied for the league lead in homeruns with 29, which gives him a slugging percentage that’s well over .500 (.554).
OBP, Slugging, walks, homeruns — can they really tell us everything about a player without actually having to see him in person? I don’t think they can tell us everything, but most of us won’t see every single player in our lifetimes, so all we can do is look at the numbers and try to base our opinions off of them.
Analysts Look at the Numbers
When it comes to analysts in the financial industry, they look at the numbers. They don’t care what you make or how great of a personality the CEO has — he wants you to produce with great numbers. Isn’t it a little frightening that the ups and downs of the market are so reliant on a group of people that care only about numbers?
This was an argument that was brought up in the sports world after Michael Lewis’ Moneyball came out. Could numbers and numbers alone really tell us more about a player than seeing him play live and in person? That’s not what Michael Lewis or Billy Beane were saying in the book, but that’s the argument that people were having after reading the book. Billy Beane seemed to take a very stats-centered approach to picking his players, while baseball has traditionally been a “scout’s game.”
Instead of scouts vs. stats guys, this very well could’ve been an analysts vs. big-picture investors type of argument.
Stats are Great…but
Trust me, I’m a big numbers guy. I love poring through as many numbers as I can because they tell me what I need to know without actually being there. And that goes for sports as well as investing (I’m trying, anyway). So it’s important that we know the numbers because that’s one half of the story, especially with investing since that’s the main way that companies tell you how they’re doing. But that’s only half of it. What is the other half and where to we get it?
Read the news
Here is what I’m trying to (finally) get at in this article: as sports fans or potential investors, we only have access to secondary sources of information. That’s OK because we have access to all the numbers. We do need to go beyond the numbers, and that’s where the press comes in. There is so much written about sports and business out there it’s incredible. Read the numbers, they will tell you a lot. But don’t stop there, keep reading and you’ll find out things that numbers don’t tell you. Look at the Josh Hamilton story, for crying out loud. Numbers will tell you certain things, but unless you know everything he went through and maybe watched the Homerun Derby, you have no idea of what’s really going on there.
Look at Ichiro Suzuki, for example. If you just looked at his numbers you would probably conclude that he’s fast, he’s a great hitter and he doesn’t have much power. Which would be right — for the most part. If you did a little reading, you would find out that his teammates are amazed every time he takes batting practice. Turns out that he can hit the ball out at will. Some even think that he could win the Homerun Derby if he wanted to — but he doesn’t want to sacrifice his average. That’s a cool little story that the numbers won’t ever tell you.
I’ve written about my experiences with Overstock before, and it’s why I considered buying their stock years and years ago. But it turns out their CEO is a little off. That can be a good thing (which is what I thought at first), but it can also be a bad thing. He has focused a lot of his attention on matters that affect the company’s stock instead of the company itself (or at least it’s been perceived that way), and that has caused a lot of investors to shy away from the company. Would the numbers tell you this? Nope.
The lesson? Read as much as you can about companies and the people running them. Make sure you know the numbers too and use all that knowledge to make your decisions. And next time you’re trying to read a financial statement and your eyes start to glaze over, don’t forget that numbers are how you first discover if there’s anything special there.
* A quick tip: if you want to see the latest news on a player (or a company), type it into Google search between quotations (“Alfonso Soriano” or “countrywide financial”) and hit enter. When the results come back, look for the top tab that read “News” and click on that. Now you can see the newest articles that have been written on that topic. And if you still want more, click on the left-hand button that reads “Blogs.” Often times there is some great insight you can’t find in the mainstream media in blogs. I’ve read tons of Minor League stories in blogs from real people who were at the game and blogged about it. Just goes to show you how much stuff there is out there.