Thursday, January 01, 2004

Everything Warren Buffett Knows
He Learned From The Padres  

The Padres of late have been following a baseball strategy that's been around for a long time, so long that it's become widespread outside of baseball.

Obtain a player who the market values as over the hill at a low price and see if you can squeeze value out of the resource for a few years or more.

The Padres signed well travelled reliever Rod Beck for the 2003 season. I happen to like "The Burbank Lutheran" because he's almost as ugly I am, and he's had a long career with many teams. Most recently, he'd pitched well for the Red Sox for a couple of years while having a few high-profile meltdowns. Virtually all relievers have meltdowns, but the public's perception can be colored by when those blow-ups occur. In 2001, Beck had 5 "blown saves," situations where he was in a game where he stood to get a save and where runners who got on against him scored so that the lead was surrendered. He was not signed for 2002 and didn't play at all that year, getting his elbow surgically reconstructed.

By June of last season, the Padres' bullpen was in disarray, with an injury to their top-notch closer and their record swirling the bowl. The Padres took a flyer on the big, rumpled, unmade bed of a pitcher with the twitchy pitching-hand motion, the high-profile failures within the good seasons and the health uncertainties. According to ESPN, the deal he signed for was $400,000 a year, pro-rated. At worst, they figured, his eccentric personality and past success might be good marketing; Beck's the kind of player fans take notice of, especially in San Diego because he looks as out of place in that hedonist sun-worshipping burg as Noam Chomsky did on his recent special appearance on the t.v. show "Survivor".

Beck totally rocked for the Padres, allowing slightly over one baserunner per inning (the gold standard) and about 8 strikeouts per 9 innings (the silver standard). They got him cheap, they didn't have to compete for him, and they put him in a situation where if he failed, it wouldn't cost them a lot (since they were 17-41 and 19 games back the day they signed him -- wow, I love www.baseball-reference.com).


This week, the Padres signed David "Super-Size That" Wells, the 40-year old starter who was very effective last year in his second stint with the Yankees. Another extroverted eccentric, Wells went 15-7 last year for the A.L. champs and pretty much earned his wins, although probably four losses he avoided even though he didn't pitch particularly well while his team racked up runs for him. But even at 15-11, he was effective. His high-profille mistake was insisting he could pitch Game 5 of the World Series and having to come out of the game in the second with an impossibly-frelled back.

The Yanks worried about Wells' combo of lard-laden body and a back that was needing a second operation, so they reasonably asked him to have a weight clause in his contract. And he reasonably refused, since he doesn't believe his physique affects his effectiveness. The Padres took a chance on the old starter with the medical problems and past history of success to a deal that seems cheap for his 2003 accomplishments (a one-year, $1.5 million plus incentives deal according to this San Diego Union-Trib story courtesy of www.baseballprimer.com. NOTE: I consider the story I linked to a little smarmy, sort of trying to sell to the fans the idea not signing top free agents but cheaper guys, but it's good useful content and is pretty sensible.


That's the pattern that financer Warren "The Omaha Ham Fighter" Buffett has learned from the Padres pre-cursors (John McGraw during his New York Giants days, The Yankees themselves in the 1950s), who obtained older-than-average, high accomplishment guys who others thought likely washed up and not worth the risk.

Buffett buys the equivalent of those players, stakes in companies that are in apparently over-the-hill industries that because they don't have implicit explosive growth obviously possible don't seem as erotically-charged to buyers as hotter properties do: Buffett's company owns stakes in companies that sell candy, underwear, picture framing stock, grocery distribution, work clothes, et.al.

Buffet's theory, like the Padres theory is conservative and fundamental; if you buy potential quality that was recently proven-quality for a low price you don't have much to lose and good potential upside.

In baseball, this strategy can fail if used exclusively or if the obtained player's recent successes weren't as good as they looked on paper, or if you use these types as an excuse not to try out young guys with high potential or if you put them in a position when if they fail your whole effort fails. In investments, this strategy can appear to "fail", because if you make a 10% return in a market where evrything is going up 40% you look like a loser, although iof you make 10% return in a market in which the average equity is going sideways or down, you look pretty good.

So don't consider it incongruous if you see Buffett donning the truly megabland new version of the Padres uni this coming season, singing the national anthem. After all, everything valuable Warren Buffett ever knew about investment, he learned from baseball.

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