Mauboussin – Turn And Face The Strange | The Acquirer's Multiple®

In their recent episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle discussed Mauboussin – Turn And Face The Strange. Here’s an excerpt from the episode:

Jake: All right, let’s jump into some Mauboussin and then we can come back to give the people what they want. This is what we want right now. So, his latest piece is about sports teams, and investing, and if there’s a ton of parallels, I think some of it is not quite always lines up perfectly just because of some of the constraints that sports teams face like drafts, and things, there’s exclusivity to a player, whereas assuming you’re not too big, there’s not much exclusivity on an investment. You tend to be able to buy whatever you want.

So, it starts out by saying sports teams like those mentioned on 벳엔드 먹튀, they’re trying to maximize two things. Winning on one hand operationally, and then also profits for the club. The first thing to ask is really like what contributes to winning, especially in a changing environment. It’s the players, it’s the strategies, it’s the tactics that should lead to winning. But for some reason, sports franchises are generally very slow to change. Why is that?

This whole paper is basically trying to address why is that. To give an example, talking about three-point shooting in the NBA, the expected value of a three-point shot, basically, the shooting percentage times the number of points that you get when you make one, is higher than a mid-range jumper, which you shoot at a little bit higher percentage, but it’s only worth two instead of three. This expected value– When the three-point shot first came about, no one was shooting them. They just thought like, “It’s too far away to shoot.” Even Larry Bird was anti three pointer, even though he was a terrific shooter.

But eventually, teams realize, well, dang, if we get better at this, have our players practice shooting threes, maybe we can score more points that way. It actually crossed over in 1990 when the three pointer was a higher expected value shot than the mid-range two pointer, and yet, it wasn’t until 2014 when teams actually started taking more three pointers than mid-range shots.

Science Progresses One Funeral At A Time

So, why did it take 25 years basically, you could almost use that observation, that science like Max Planck observed that science advances one funeral at a time. Maybe the same thing is sports science advances one GM canned at a time, but– Daryl Morey was one of the first ones to realize that he was the GM of the Houston Rockets for a long time. Now, I think, the GM of the 76ers. But he observed that, when you shoot more threes than midrange twos, that equated to 12 more wins in a season, which is almost the equivalent of adding $30 million to your salary, to your payroll.

Then, Mauboussin observes that this three-point idea is pretty well out of the bag now, it’s been competed away, and now, the next thing might actually be offensive rebounding. So, teams have traditionally not sent everyone to crash the boards to get an extra possession and an extra shot, because they’re worried about getting back on defense. There’s some game theory playing out there potentially right now.

We sort of zoom out, why is change impeded? Why are these teams so slow to change? Mauboussin puts forth three different reasons, all of them behavioral ideas basically. But the first one is loss aversion. This is Keynes classic thing about it’s dangerous to fail unconventionally. It’s better to just for your job prospects to fail conventionally, and not stand out, and get fired. Basically, only the really losing teams or the winning teams that have enough goodwill to try new things with their fans are in the sweet spot enough to be able to try out these novel experiments. Everyone most of the time are stuck in the middle and they can’t really get out of the middle because of that.

Status Quo Bias

Number two is the status quo bias, which is where we favor doing whatever we were doing. There’s an inaction and– We observe inaction as a neutral thing, whereas if you take an action and it was wrong, then you get fired for that. There’s also the endowment effect where the GMs, they’ll re-sign players for higher than they should have on a base rate, if they were just to hire them as a free agent. And then, there’s sunk costs. The teams are more likely to play their first-round picks as opposed to later picks, even if the later ones are proving to be better players. We spent a first rounder on this guy, we’ve got to play him, see what we have.

Then, the third reason is sample size. There’s lots of randomness in any given year. Sometimes, a guy will be a terrific shooter, and sometimes, he’ll just have a terrible night and you’ll lose. The tactics that are supported by analytics don’t always work. It’s a statistical thing where you have an expected outcome, but you don’t always get it. Thinking about hitting into like when teams do the shift, let’s say there’s a lefty up and they move everyone over to the right side of the field, and then, it’s a ball that gets hit that looks like it should go right to where the shortstop is, there’s nobody there.

So, that’s a base hit, and you go, “What are you doing?” Those are very painful for the fans and for the pitcher maybe, where like, “God, I just got the ground ball to short, and there’s nobody there to make the play.” But we don’t notice as much when the guy rockets one towards where the second baseman wouldn’t have been, and the guy who’s playing in the shift gets it and gets the out. It’s all about playing percentages.

The last thing here is the importance of time horizons. The NBA average for the number of seasons with the team for a player is 1.9 years. This is pretty short turnover. It’s an average of two years that you’re going to be with a team. A coach is two and a half years, the GM is 4.9 years, the owners 10.9 years. The example of this is last year, the New York Jets were 0 and 13 going into whatever, week 14. The perfectly logical thing for everyone upstream of that coach would have been to lose these next three games, get the number one pick, and go get Trevor Lawrence. That’s who everybody wanted. Instead, the coach, because he’s on a shorter time horizon, goes and they went to the next three, and they don’t get the number one pick. You have these time mismatches.

Optimizing Draft Capital

Another interesting thing here is that they’ve done some really cool work on what they called draft capital. What is the number seven pick in the first round worth relative to the number of 15 pick in the second round, let’s say. So, there’s different scoring that you can use for that to figure out what is a particular pick worth. That’s based on what the expected value is of a mid-range or a mid-round second pick, what they typically produce. The Browns from 2017 to 2018 were in full rebuild, full tank mode, and they actually built up almost two extra drafts worth of draft capital for the subsequent years by trading away their reasonably good players then for picks later. So, basically, optimizing draft capital over a different time period than just that one year. It’s allowed them to rebuild in a reasonable way. The Dolphins and the Jags have been doing something similar recently.

Your Albert Pujols Stock

Jake: Last thing, maybe, the most interesting, Albert Pujols. Cardinals, first ballot obvious Hall of Famer. 2011, he’s 31 years old and the Angels sign him to a 10-year $240 million contract. Based on what’s observed, he contributed about $40 million worth of team value of baseball production to the Angels over that time period. So, it was like a $200 million hole that was created in relative what they paid, and that happens a lot. So, I thought it’d be fun for us to throw it out there to the chat as well as I’d like to get your two guys ideas on, what is the possible Albert Pujols in 2011, today? What’s the stock that has done Hall of Famer right up until now, but maybe long in the tooth that you don’t want to sign up to that 10 year and very expensive $240 million contract?

Tobias: The reason why it took– it was 1990, they figured out that shots, three points were worth more than two pointers is basically because on average, you get a little bit more, and then it takes until 2013– is that Steph Curry or someone like that comes into the league and starts. Is it too early for him?

Bill: No.

Jake: No.

Bill: I don’t think it was him, but go ahead, Jake.

Jake: No, I think it was just statistically, well, one the players actually started training on the three-point shot a lot more. So, you had these guys, they just park them in the corner, and they shoot like they– [crosstalk]

Bill: Yeah, like Kyle Korver, guys like that. They would just sit there and shoot threes. The Suns were one of the first running gun three-point shooting teams. Mike D’Antoni, I might be wrong on that, but that’s a version of the truth I’m going to tell.

Tobias: I don’t know if it was– when Moneyball came out, it’s not that the As were doing anything that was– The structure had been created for the As to do exactly what they were doing. It just seemed nobody was really exploiting that the way that the As were. Now, everybody’s aware of the Moneyball phenomenon. Every single clubs probably got the data guy who can tell you which position to have– Maybe, it just took a little while for that to bleed into basketball. It just took a little bit longer. Now, everything is sort of– they’ve got data on everything, and they’re tracking all that stuff.

Jake: Yeah. Part of it is, how hard is it to measure things? Hockey is harder to measure than baseball, which has very discrete actions. You either made an out or you didn’t, but the hockey equivalent of that is like, what were you in the right place or not. So, until you had player tracking, it was a much harder thing to keep track of. Basketball is the same way too. It’s a more fluid game. So, it’s harder to measure maybe the effectiveness of driving in or who’s good at spacing themselves, who finds an open spot. Those are harder things. They’re a little bit more subjective maybe than just purely this guy got a hit or even measuring the exit velocity of the ball in baseball, which correlates well with hits. So, a lot of it has to do with the sport itself that’s intrinsic to it.

Tobias: Investing doesn’t really suffer from that because there’s a lot of data. There are a lot of other confounding factors too, but there’s also a lot of data. There’s a couple of good suggestions in the chat. One is Peloton and the other one is Tesla. Tesla’s almost like– they’re probably the most obvious one, but Peloton is interesting.

Bill: Yeah, I don’t know.

Jake: I would say, it’s early for that one. Peloton to me seems like coming off of their rookie contract and about to sign a big contract, but it’s not sure whether– they put up some good numbers but maybe they weren’t expecting a really big payday. I don’t know.

Tobias: I guess the Zoom-s in the same– Same idea as Zoom, right?

Bill: Yeah, I just think those companies are so young that they’re not a great Pujols.

Jake: Agreed.

Bill: They’re not a great like Pujols comp yet.

Tobias: What about Tesla then? Tesla’s got the age, got the valuation.

Bill: Yeah, maybe, I don’t know. I think anybody that shorts a guy that shot four random civilians into space is out of their fucking minds.

Tobias: I’m not saying necessarily shorted. You clearly can’t short that stock, but just in terms of underperforming the index for the next decade.

Bill: Yeah. Could work. I don’t know. I have no idea where the cult will bid it too. I would be like more– I don’t know. Dude, beer as a category–

Jake: [crosstalk] like bid though. It’s about production versus price.

Bill: Yeah. Beer is a category would make me nervous to pay up for. CPG continues to be– I don’t know. People are going to hate this, but if you need one– The thing about Pujols is I think that they knew that he wasn’t going to be worth the back end of the contract. That’s the unique thing in sports. You’re bringing them in for what you hope to be a World Series or something, but there’s part of me that wants to say, “Watch out for some of the narrative around luxury.”

Jake: Yeah, but you don’t sign a 10-year contract for a guy like that when you’re trying to win today. You put them on a two or five year. 10 years, that’s a big commitment.

Bill: Yeah, but I think if you think you can win today and you got Mike Trout, you pay him what you need to. I don’t know. It’s a dick- measuring contest at certain stages. It’s not like an investment portfolio.

Jake: [laughs]

Tobias: There’s also marketing for those guys. You want [crosstalk] so well known and liked, and people go and buy the shirts with their names on the back.

Bill: Yeah, and I think, you can bring in– You don’t want to pay a guy $30 million to just coach up young guys. But a guy like Pujols was so well respected that I think having him in the clubhouse can go a long way. There’s some nonmonetary benefits.

Tobias: Apple.

Bill: I don’t know.

Tobias: Good a couple of suggestions, Apple and Facebook. Theranos, good one.

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