Very often, I'll hear announcers refer to a player as a "Moneyball" player simply because he walks a lot. However, this is NOT what Moneyball is about.
The "Moneyball" philosophy is about finding undervalued players/talents. In fact, it's very similar to investing, which I think is major reason why I like it so much.
Think about it like this:
An investor has a certain amount of capital (money), and they use that capital to purchase assets (stocks, bonds, etc.). Those assets then generate a return (profits).
Baseball teams have a certain amount of capital (a combination of cash and roster spots), and they use that capital to purchase assets (baseball players). Those assets then generate a return (wins).
In investing, sometimes a good company is not always a good investment. Case in point: Johnson & Johnson (JNJ) is an excellent company. Well-run with steady growth and good market penetration. Let's say, for instance, JNJ's "true" value is $100 a share. If the stock is trading at $150 a share, that would be a bad investment. You would be overpaying, even though you're buying an excellent company. The "return" on the stock would not be worth the money you spent on it
In baseball, players can be overvalued, even if they are good. Let's say, for instance, a team is interested in Albert Pujols. If Pujols tells them "I will not sign for anything less than $50 million a year", signing him for that much money would be a bad investment. As great as Pujols is, the "return" on an investment in him is not worth $50 million a year.
On the opposite side of things, a less-than-great company can be an excellent stock. Let's say, for instance, you are interested in Merrill Lynch. The company lost like $10 billion last year, because the company took too many risks with its investment portfolio. As a result, the stock price came tumbling down, and the CEO was forced to resign.
However, what if the new CEO is able to turn things around effectively? It's possible that the stock price will not adjust in time, and the stock might trade at $50, when it's really worth like $75. Thus, purchasing this stock would generate an excellent return, despite the fact that the company has been struggling lately.
The same thing happen in baseball. Let's say, for instance, Adrian Gonzalez of the Padres is a quality first baseman, but for some reason people aren't noticing. He plays on a crappy team, so he doesnt get a lot of media attention. He's not flashy, so he doesnt get any endorsements. His teammates are generally poor hitters, so he doesnt have as many opportunities to drive in runners, and doesnt he get knocked in by the players behind him as often as he would if he played for the Yankees or Red Sox. Also, he plays in a huge ballpark, so a lot of deep flyballs that would be HRs in other parks end up being caught for outs. His "true" talent level dictates that he is a $10-million-per-year, but since nobody knows how good he is, he is willing to accept $7 million per year.
Under the Moneyball philosophy, you would pass on Pujols for $50 mill., and sign Gonzalez for $7 mill instead.
Now, it doesn't have to be individual stocks/players. It can be more general than that.
There are many different types of stocks out there. Technology stocks, healthcare stocks, dividend-paying stocks, highly-leveraged companies (companies that have a lot of debt), stocks of foreign companies, stocks of companies that do a lot of business overseas, etc.
Sometimes, an entire group of stocks will be undervalued or overvalued. Perhaps, for some reason, the market decides it doesn't like technology stocks, or perhaps investors don't realize that there is about to be a technological boom, and the industry is going to grow at a rapid pace for the next few years. Then, technology stocks would be undervalued, as a group.
Or, let's say the recent economic struggles have scared investors, and they've flocked to a "safe" industry, like healthcare (this industry is not sensitive to the economy, since people need healthcare regardless of the economy). The prices of these stocks probably would have shot up, perhaps above their "true" values. In this case, healthcare stocks would be overvalued, as a group.
You can look at baseball players the same. There are various types of baseball players: sluggers, speedsters, LHPs, RHPs, starters, relievers, defensive specialists, high-contact guys, patient hitters, etc.
It's possible that MLB GMs can overvalue or undervalue an entire group of players. Under the moneyball philosophy, you would identify the undervalued groups and/or traits (speed, power, defense, etc) and buy players in this group or that exhibit these characteristics. Or, you would avoid the players in the overvalued groups.
When Moneyball was written, and when the A's were having the most success, many GMs were struggling to correctly identify the true "value" of certain players or certain traits. However, Billy Beane looked at research that had been done by men such as Bill James (who currently works in the Red Sox front office). This research showed just how much certain characteristics add to the success of a team. Basically, how many additional wins you can expect, the more you increase or decrease certain characteristics of your team.
What Beane did was identify the player characteristics that were not being fairly valued by the market. Basically, he found that players who exhibited certain traits were not being paid as much as they should be, based on how many additional wins they could be reasonably expected to provide.
There's an additional wrinkle here. Baseball differs from investing in that you can't buy a "share" of a player. You buy the whole player, or you dont buy him at all. This is the equivalent of having to buy ALL the stock of a company that you want to invest in.
So, for instance, let's say two investors have to build a portfolio of 25 stocks, and see who has a better performance. Investor A has $200 billion to spend, but investor B only has $50 billion to spend. Let's say they both think Home Depot is a great company, but the cost to buy all of its stock is $30 billion. If investor A buys Home Depot, he still has $170 billion to spend on the other 24 companies in his portfolio. However, if Investor B buys Home Depot, he will have used up 60% of his budget, and he only has $20 billion to spend on the other 24 stocks in his portfolio.
This is like the case of the Yankees and the A's. The Yankees can spend $200 million on their team, but the A's can only spend $50 million. Obviously, A-Rod is a great player, but he costs like $30 million a year. the Yankees can pay him that, and still afford to buy other great players. However, this would use a majority of Oakland's budget, and the team around A-Rod would suck. Thus, Oakland not only needed to find undervalued players, they needed to find players that would not take up too much of their budget (note: just because a player is undervalued, doesnt mean he's "cheap". A GREAT player can make a LOT of money, and still be underpaid)
During the time Moneyball was written, the "market" for baseball players basically stood as such: Sluggers were valued either fairly, or slightly overvalued. Everybody knows home runs are good for the team, so guys who hit a lot of home runs generally get paid the money they deserve. Speedy guys were overvalued. Speed certainly has some value, but fast guys were getting paid more than what their talents were actually adding to the team. However, guys who drew a lot of walks were undervalued. These players were being paid less than what their actual contributions to their teams were, because people did not realize the true value of a walk.
Thus, Beane shunned speed guys, couldnt afford the power guys, and focused instead on high-OBP guys. By avoiding the "overvalued" players and focusing on the "undervalued" players, he was able to generate a return (number of wins), above what you would expect, given the limitations of his capital (monetary budget and roster spots)
But a funny thing happened along the way: other teams figured out what he was doing and started emulating him (the book also contributed to to other teams wising up). Now, high-OBP were no longer undervalued. They were probably fairly valued. Thus, Beane needed to find a new, undervalued players. An example of this was his signing of Frank Thomas. He was viewed as a malcontent on the downside of his career. As a result, teams were not willing to pay him his true value. But Beane swooped in, signed him to a low-risk deal (1 year, $10 million), and got a GREAT year out of him.
So, the "Moneyball" approach is always changing. It's not always about guys who draw walks. Perhaps in the future it will be speed guys. Or defensive wizards. Or relief pitchers. What it will always be about, is finding guys whose value to the team is not being reflected in their salaries.
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