Sunday, January 04, 2004

Push Back on The Padres  

A few days ago I wrote about The San Diego Padres dredging up an old John McGraw trick of exhuming the careers of old, un-sexy vets whose present value was underestimated by rivals, and how this old McGraw trick was imitated by Warren Buffett in his basic approach.

Mentioning Buffett's name is like throwing an armed hand grenade into a idyllic New England pond -- no matter how calm everything looks beforehand, that one small, seemingly insignificant act dishevels everything.

The anthropologist in me should have known that in a culture that maintains as its main religion a faith in Commerce, that successful, transcendent investors will be Saints, with their own hagiographies, icons and legends. The incoming mail was scalding-to-blistering, as you'd expect in a discussion of either God, or of Pete Rose's record of accompishments. [My favorite dissertation on these kinds of cultures is a film by Luis Bunuel, The Milky Way, in which characters each represent a faction of medieval Christianity and carry on violent arguments, lifted right out the debates of the time. Twelve to three centuries later, these debates take on the edge of parody -- as in the "how many angels can dance on the head of a pin" debate. Three to twelve centuries from now, even specialist historians will wonder why we worshipped, or demonized, or paid much attention at all to Warren Buffett, though I'm confident the San Diego Padres will still be of interest. If you have any interest in comparitive religion, or had a serious Catholic education, or ever owned a copy of The Singing Nun's smokin' hit single Dominique, you won't want to miss The Milky Way].

Bypassing the ignorant messages, I want to reprint two opinions from informed, intelligent people who disagreed with me. The first comes from the discussion board at Baseball Primer (lots of plaque in that particular discussion, again, triggered by the polarizing influence of Saint Omaha -- if you decide to go there, you can skip down and start at message #18, excerpted below), and is from the editor/publisher of the very fine Baseball Graphs site, the pseudonymous studes..

Posted 8:17 a.m., January 2, 2004 (#18) - studes (homepage)
  I like Jeff's blog, but I think he may be missing the more interesting part of the Buffett analogy.

Buffett buys value, he buys brand, and he buys very good management. It's may not be fair to say that he moved jobs out of Maine (don't know for sure), because he doesn't make the operating decisions of his companies. He buys companies that have great management, and doesn't interfere with them.

He doesn't buy growth stocks, because growth stocks are overpriced gambles. By definition, this means he's more likely to invest in mature industries.

Most interestingly, he buys brand names. He thinks that brand name is a huge corporate asset, so he's bought Dairy Queen, and he's invested in Coke, McDonalds, American Express, etc. primarily because he thought they all had unbeatable brand names.

Isn't that what the Pads are doing here? They want to maximize the revenue generation of their first year in a new park, so they've bought a brand name to help bring in the fans. Brand name at a good value, too (unlike Maddux), which is more to Jeff's point.

Berkshire Hathaway has established a pretty good brand as well (a brand that is reinforced, by the way, by its spartan web page). "Warren and Charlie" established their brand via outright performance, which is the other analogy that should be applied to all baseball teams.

Good points, though I was compelled to push back on a couple of studes' contentions.

Agreed that your analysis adds value to what I said. The Buffett method for assessing value is eccentric and does *include* the perceived value of brand; and yes, this he also learned from baseball. Your example about using a recognizeable name to put gluteii in the seats of the new stadium holds even when you don't have a new stadium to a-gluteii-nize, too. Trade for recognizeable names bring interest. I think you might have mentioned Wells' particular "brand" attributes: eccentric character & no-hitter.

One push-back: While the Omaha Stake guys DO assign brand as part of value, it's a serious factor, not the factor. For example, if you go to their most recent quarterly posted on their site -- http://www.berkshirehathaway.com/qtrly/3rdqtr03.pdf -- on page 6, here are the names of the companies they bought that quarter: McLane Co., Clayton Homes, Albecca Inc, Fruit of the Loom, CTB Int'l, The Pampered Chef, Garan Inc. One "brand" name, one tweener, five others.

The other argument was more oppositional, and was from baseball writer Derek Milhous Zumsteg. DMZ writes both for the informative Baseball Prospectus and the delightful U.S.S. Mariner blog in which he's a partner with two other talents: David Cameron and Jason Michael Barker. He was borderline p.o.-ed at my contention that Buffett had anything to do with his home team's (Seattle Mariners) allegedly-all-natural rival, the Padres. His note, lightly abridged:

I was shocked to see your 1/1 entry, which is.. it's wrong.

Buffett never engages in the kind of activity you describe. Berkshire Hathaway doesn't buy companies with injuries or decaying companies hoping to squeeze some kind of turnaround value out of them. It's why Buffett named his company after his first try at a turnaround of a bad company that ended up failing on him, to remind himself that this is a terrible idea. Buffett and BH look for good businesses that are stable money earners and will be for years that are also fairly or undervalued which is an entirely different thing than trying to "squeeze value out of the resource for a few years or more."

Take the pre-fab home business they just bought: the industry's distressed because the industry in general went on a lending binge that caught up to them, so when BH found a well-run sustainable business they bought it.

It's the Blue Jays being first to really start recruiting in the Dominican, or the Mariners and Dodgers on the Pacific Rim. The A's and Blue Jays today believing they can get more value from drafting collegiate players.

Buffett frequently says that his intention when buying a company is to own it forever. There's no short-term value proposition here, and there never has been for Buffett or Munger or either of their companies.

It's an important distinction. He's not the Padres, and he's not even like the Red Sox investing in a bunch of good short-term values like Ortiz, Walker, etc. He's more like what Billy Beane would do if he was more rational about his choices and had nearly infinite resources: make consistently sound long-term decisions investing in high-quality, undervalued resources.

The Padres are like a penny stock speculator, and bear little if any resemblence to Buffett.

Some good points, but I still disagreed, thus-like:

Don't disagree with everything you say, but core of our disagreement is over a statement I'll make as follows --- Buffett/Munger investment core rule is value (ability-to-deliver now + probabalistic potential to continue to deliver) / ($ cost + investment required to get management to positive). No company lasts forever as a significant entity because while it's legal for a company to ignore their charter and go into a separate biz, effectively they don't (see Zapata Corp. or Biospherics as classic examples, or the renewable energy biz of Exxon or Grumman-Northrup). Company careers are 'longer' than ballplayers, but the stages are comparable (call it dog years or something).

So the Omaha Stake guys don't buy start-ups (rookies) or early-stage companies with low current earnings potential but massive up-side (AAA phenoms). They don't buy current glamour stocks P/E=80 and low cash flow (Moises Alou or even Jeremy Giambi). They buy established companies, usually in older, low-growth sectors, and that either have hit a spot of trouble lately, have been hit or ignored in the market for no good reason beyond their industrial group (are undervalued). Sometimes they buy blue chips or white chips that, because the stock market is very inefficient as a result of too high a ratio of resources in too few hands (79% of families in the U.S. don't own a single share of stock they control, even with IRAs and the like), are currently "undervalued" and which have reason to come back over time.

This works for them, so it pleases them, so they continue to do it.

In the same way, The Padres were extremely pleased with their Beck move. He had a record of pretty good success, no massive upside, but clear chance of solid success at a very low price relative to the risk. And so Wells is an attempt to reproduce that move. His performance last year (and if you disagree, go over the start log...he really did earn 15 wins clearly) was very very good, certainly worth $1.5MM + incentives. The Padres know that if he's healthy, he's as reasonable an acquisition as any FA starter after Vazquez (perhaps Colon, too), and for a third less than Quinton McCracken money.

Buffett learned this sitting at Joan Kroc's lunch table back when she ran the team with Trader Jack. And Buffett's strategy is remarkably parallel, IMNSHO. Unsexy old talent that's being undervalued monetarily that fits in, maybe even synergistically, with the other old unsexy talent on your roster.

And just as John Moores is saying he won't break the bank to buy glamour, his student, The Omaha Stake guy, knows you don't break the bank to buy glamour. 

If you can accept that the trajectory of a investment's life is like a ballplayer's career, though chronologically longer in the case of more successful companies, my argument, I think, holds the field. Moreso if you believe, as I do, that a failing company requiring a turnaround are not really like Padres Beck and Wells, with their recent successes. DMZ didn't respond in depth, not because I swayed him, I suspect, but because the name "Quinton McCracken" rendered him torpid.

Next entry: Everything George Soros Knows About Currency Transactions He Learned From Joe Garagiola. NOT.

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