Supported by Greenhaven Road Capital, finding value off the beaten path.
Fresh off his World Series victory Jeff Luhnow sat down with the Wharton Moneyball guys to explain how he did it.
Actually, that’s not true. The Moneyball interview is from months before the season and that’s even better. Rather than looking back and constructing stories, we get Luhnow without the haze of hindsight. Here are my notes.
Be different. Being Different is advantageous. It means approaching stale problems in fresh ways. Luhnow’s career arc is an example of this.
“My first career was as an engineer…then I went back to business school and then McKinsey…it’s not the traditional path to becoming a sports executive but I think my education and experiences outside of baseball have been really important for me in being able to do my job here.”
In what ways does this help? Luhnow said that as General Manager he has to triangulate opinions from scouts, algorithms from analysts, and market conditions. “Those fundamentals are really similar to a lot of other businesses and being able to incorporate that thinking has been very important to me.”
Alpha erosion. Good ideas get copied.
“At this point (circa 2016) If you look at the transitions in the front offices, all thirty teams – for the most part – have analytical teams. They have general managers that have spoken about the importance of using information in decision making. The advantage you can gain from doing the Moneyball approach has dissipated. It’s now a level playing field. We’re all looking for the next area of advantage.”
“The reality is, whoever wins the World Series teams try to copy them.”
“Any edge in the market is limited, small, temporary, and quickly captured by the smartest or best informed investors.”
However, as one of the Wharton hosts noted “There’s always a narrative wrapped around recent successes. Some of which is due to luck and some of which may be a systematic change.” As anyone who’s taken eighth-grade science is aware, it’s better to copy the smart kid than the lucky one. Yet the copier is ignorant of this.
In Michael Mauboussin’s book, The Success Equation he unravels skill and luck – as best he can. “Most of the successes and failures we see,” Mauboussin writes, “are a combination of skill and luck that can prove maddeningly difficult to tease apart.”
Stakeholders. Not even James Bond has carte blanche, but Luhnow had a pretty good arrangement.
“Normally when you take these jobs you have a lot of constraints; keep this manager, do this, do that. I asked Jim Crane, ‘What are my constraints if I take this job?’ He ripped out a blank piece of paper of the pad he was holding.”
Baseball also has a certain kind of fan.
“I think fans are never patient but in baseball, the typical fan is aware of your farm system…and there’s a certain amount of patience baked in.”
The type of owner matters too.
“Owners recognize that we’re playing the odds. As long as we have the odds nudged in our favor we’re going to have better results in the long haul. But it’s not like blackjack that we can sit there and play a million hands.”
Aligning the different stakeholders; fans, owners, employees, etc takes good communication.
“I spend a large part of my job managing those stakeholders. It all comes down to communication.”
We’ve speculated – along with Ben Falk – that part of the reason Sam Hinkie was fired was because of poor communication. As Josh Brown cautioned, “If you’re just telling a client, ‘Shut up I got this,’ you’re not going to be the client’s advisor for a long period of time.”
Frontiers. As edges erode frontiers are found. Two examples from baseball are pitch framing and defensive shifting. These two things are wonderfully told in the book Big Data Baseball.
New means must make sense. People want to understand.
“The key for us was building a tool that linked results to video so you could actually see the pitches where a catcher took a ball from inside the strike zone to outside or presented a ball that the umpire called a strike. Once they visually see it and we show them how the data aggregates up to an answer they’ll do drills that will make them better.”
Luhnow adopts the investing mantra that the best plan is the one you’ll stick with.
“You can get 80% of the value rather than 100% by presenting it in a way that really allows you to have an impact.”
Empathy is magical. When asked how analysts can get their ideas considered Luhnow said:
“The most important thing is to talk to the people in the industry who are going to be affected by the recommendations you’re making. Try to understand from a scout’s perspective why they see things a little differently or from a player’s perspective why they may be resistant to whatever it is that you’re working on.”
Those people may know things you didn’t consider. Feeling heard matters too. Jeffery Solomon said, “The number one thing you need to think about as a manager is empathy.” Dan Carlin reminds us about studying history, “There’s this thinking that if we try to understand them we’re justifying them and that’s not what we are doing. You want to understand what makes monsters tick.”
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