Finding Hidden Moneyballs in the Stock Market - Profit Hunter by Equitymaster
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Finding Hidden Moneyballs in the Stock Market

Aug 10, 2018

Taha Merchant, Research Analyst

Movies are always fun! They let you escape the real world and take a walk in the land of fantasy.

And the best kind of movies?

The ones that seem fantasy-like, but come with the kicker that they're actually true stories.

I got a chance to catch up with one such movie last weekend - Moneyball.

This Brad Pitt starrer is set in the glamourous world of baseball (to imagine how crazy the Americans are about their baseball - just think of it as America's cricket).

Moneyball is the true story of how Billy Beane - general manager of a particular baseball team - uses unconventional strategies to win big in baseball by taking advantage of all the irrational behaviour that was going on in the sport at the time.

Owners of baseball teams buy players at varying prices (pretty much like the Indian Premier League) to make their teams.

And those days teams would run after coveted 'star' players and paid an obscene amount of money to get them.

Such glamour based player-picking, however, was rife with silly biases and often bereft of logic...

But Billy was managing a small-budget team, he had little money to pay for players - so he couldn't afford the stars.

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So he hit upon a way that cut through the fluff by using player statistics to buy unloved and neglected - but undervalued players for cheap.

When I saw his system for picking players, I realized that was the exact system we use over here in Microcap Millionaires to pick stocks from the stock market!

The Silliness in Stock Picking

Here is one dialogue from the movie... Pay close attention to what this guy says about baseball, and then I will give you the stock market version of his words:

  • Baseball thinking is medieval. They are asking all the wrong questions. There is an epidemic failure within the game to understand what is really happening.

    And this leads people who run Major League Baseball teams to misjudge their players and mismanage their teams.

    People who run ball clubs, they think in terms of buying players.

    Your goal shouldn't be to buy players. Your goal should be to buy wins. And in order to buy wins, you need to buy runs.

    You're trying to replace Johnny Damon. The Red Sox [another baseball team] see Johnny Damon and they see a star who's worth US$7.5 million a year. When I see Johnny Damon, what I see is... an imperfect understanding of where runs come from. The guy's got a great glove. He's a decent leadoff hitter. He can steal bases...

    But is he worth the $7.5 million a year that the Boston Red Sox are paying him? No!

Just think of the 'team owners' as investors...

The 'game' as the stock market...

The 'runs' as 'earnings'...

The 'players' as stocks...

'Player-picking' as stock picking...

And the 'team' as a portfolio....

And you'll quickly see what I'm getting at... if there is ever a course on deep value investing, this movie ought to be mandatory viewing!

I'll give you my little 'investing spin' on the above movie dialogue:

  • Stock market thinking is medieval. They are asking all the wrong questions. There is an epidemic failure within the stock market circles to understand what is really happening.

    And this leads investors to misjudge their stocks and mismanage their portfolios.

    People who invest here, they think in terms of buying stocks.

    Your goal shouldn't be to buy stocks. Your goal should be to buy wins. And in order to buy wins, you need to buy company earnings and networths.

    You're trying to replace XYZ Ltd in your portfolio. The stock market sees XYZ Ltd and they see a star who's worth Rs 100 billion. When I see XYZ Ltd's valuations, what I see is... an imperfect understanding of where stock price appreciation comes from. The company's got a great business. A decent growth rate. It can perhaps sustain its market share...

    But is it worth the Rs 100 billion that the stock market investors are paying for it? No!

Now you see what I'm getting at.

Here's more from the movie - of Billy's assistant Peter trying to convince him of this different approach:

  • Using (performance) statistics (of various players) the way we read them, we'll find value in players that nobody else can see. Players are overlooked for a variety of biased reasons and perceived flaws. Age, appearance, personality... and mathematics cuts straight through that.

    Billy, of the 20,000 notable players for us to consider, I believe that there is a championship team of 25 people that we can afford, because everyone else in baseball undervalues them.

The similarities to what we do here at our Benjamin Graham inspired deep value investing service Microcap Millionaires is uncanny.

We find value where others see flaws.

Over the years since we started the service, perhaps the most frequently received reaction from subscribers has been that of raised eyebrows about many stock we've recommended.

  • 'How can you recommend this stock? It's just reported such a bad result!'

    'Why would you recommend a commodity company when commodity prices down in the dumps?'

    'The industry is in bad shape. There is excess capacity. The company's profits have fallen and will fall further. How can you ask us to buy the company?'

Reactions of this sort to Microcap Millionaires stock picks have always abounded.

Microcap Millionaires stock picks tend to be the unloved 'misfits' of the stock market. But by relying on cold hard numbers, and using the quantitative performance statistics of various companies the way we read them, we're able to cut through all the noise and glamour, and ask the right questions, to find value in stocks that nobody else can see.

And this I would say has been Microcap Millionaires biggest strength, and the reason for the excellent stock picking track record.

I'll end with what is perhaps my favourite line from Billy Beane in the movie - which cuts straight to the heart of Microcap Millionaires:

  • And I hate losing, I hate it. I hate losing more than I even wanna win. And there's a difference.


Taha Merchant
Taha Merchant
Research Analyst, Microcap Millionaires

PS: In the last week Apurva Sheth, the editor of our premium trading newsletter, has recommended 4 stocks - he just closed one with a profit of 11.92% in just 6 days. 3 stocks are still a buy right now - but Apurva believes the prices will start going up very quickly. So if you have ever wondered if you can trade safely and easily, follow Apurva here.

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