March brought us the Madness of college basketball, and April, opening day for Major League Baseball. In this two-part series, David describes his love of sports and cross-overs between that and investing. You can become a better investor by outthinking sports-talk analysts with their clichés and threadbare thinking.
Rule Breaker Investing
How Sports-Talk Radio Makes You a Better Investor (Part 1 of 2)
It's the Rule Breaker Investing Podcast with Motleyful Co-Founder, David Gardner. And welcome back to Rule Breaker Investing. I'm David Gardner. Thanks for joining me. Here we are starting April and this is the first podcast I'm doing the week. It's actually airing for the last few weeks because it was spring break for the Gardner family last few weeks and I was away skiing in Utah. My teenagers broke his leg but besides that, it was a great trip and really overall it was a great trip. No regrets. We're in a convalescing time now back at the Gardner household. But in the meantime, I was happy to see this week. Clearly somebody was listening to this podcast as I went over three painstaking weeks of risk ratings and focusing on two companies and one of them was Virgin America and I don't know, was the CEO of Alaska Airlines or maybe the CEO of JetBlue. Everybody was listening to that podcast as we showcase Virgin America. You may have noticed this Tuesday, the stock was up 40% in one day. Now do I personally own Virgin America? I'm sorry to say I don't. I think I have 205 stocks under active recommendation through our Motleyful Services. I do not own them all. I wish I could. I especially wish I had owned Virgin America this week but I do like to think that there's at least one member of this podcast, one regular listener who did actually buy shares of Virgin America as a consequence of our focus on risk ratings in March. And you, sir or ma'am, we're very, very happy when Alaska Airlines mentioned it had won the bid and Virgin America went up 40% in one day and it's been a good investment for us in rule breakers. I guess it'll be disappearing as Virgin America anyway but up 70% or so since we recommended it just last year. Credit to Tim Byers, a long time member of my rule breaker team, it is Tim's pick. If you are a VA shareholder, you have Tim Byers to thank. And I'm also taping this week's podcast the very next morning after watching a remarkable end to the college basketball season. I realize ahead of time that not everyone listening to rule breaker investing cares at all about sports or even if you do, you may not even look at or think much about United States college basketball. I also know that I have some serious junkies who listen to this show every week as well. So I want to say one or two things to you and then introduce our series for April. So my one or two things I want to say to you if you're a big fan is what a tremendous and that was to the basketball season. I went to the University of North Carolina. I am a Tarhill and my team lost for those who weren't paying attention. One player hit a shot with four seconds left and incredibly contorted remarkable shot from long range to tie the game and then the other team came down, not my team. This is a Villanova University and threw it down in the last second for the winning shot. So it was a pleasure actually to see two players perform at their best. And the game wasn't at all about somebody who missed a shot or somebody who feels bad afterwards. It was that there were so many good moments at the end of that game. But even as a North Carolina fan, I want to say congratulations to Villanova and all Villanova grads. We have at least one who works here at the Motleyful Headquarters way to go, Alyssa. But beyond that the better team won, Villanova had a higher power rating. I'm going to talk about this at some point, a higher power rating going into the game. And even though North Carolina was widely perceived to be the favorite and had a higher seed, a one seed in the tournament, Villanova was the best team in college basketball this year. And I honor their head coach, Jay Wright and their entire program class all the way and really two just great teams and programs. It was a pleasure to watch. And it made me think about how much I love sports. And that made me think about two things. One, why do I love sports so much? And two, how does that connect to investing? And that's what I'm going to be doing in a short series this April. In fact, it's just going to be this week and next week. And this week I'm going to be a little bit more autobiographical and next week will be a little bit more thoughtful. But sports and investing, there is a lot of crossover for those of us who love sports, to those of us who love investing. There are also people who really love sports and don't even know about investing, which makes me sad and part of our Gold, the Motley Fool's to make that not happen as much in the future. There are also people who just love investing and don't give a hoot about sports and I certainly can understand disconnecting those things. But for me, and what I want to talk about this week in our brief time together is all the crossover that I see and why I think it matters and why it's important to you, whether you're a sports fan or not. Whether you're an investor or not, if you're one or the other, I think you should be both and I'm going to talk about that some this week. In fact, really, this series is about thinking. It's not even about sports as I hope will become evident. And in that regard, I want to hook back to, it was October 7th of 2015. If you go back to iTunes, if you're new to our podcast, I did a 21-minute episode that week about, it was entitled, "How Investors Should Think About Thinking." And that's really what we're doing every week as rule breakers and participants on this podcast. We're just, we're trying to think as smartly as we can about the world, often we're trying to think in a different way. Steve Jobs think different. We're trying to think in a different way from the way the rest of the people in the world are thinking about a subject, whether it's sports or investing. And so if you want to go back and just go back and listen to those 21 minutes, I think that'll be a good companion to our short series this month, "How Investors Should Think About Thinking." So sports and investing. So how did it start for me? I grew up a baseball fan. I was raised in a baseball family. I loved playing the game. Sadly, my playing day is ended in high school, as is the case for many men and women, whether it's hardball or softball. You have to be really, really good. I never was to play sports in college. But I love baseball. I still love baseball. In fact, one of the things, even when March Madness every year ends here in the United States, baseball starts right about the same day. And so there's a lovely transition. Part of the reason sports are on my mind this month is I think April is just a great time here in America as we transition back to our so-called national pastime baseball. But for me, it was just, I remember my first baseball game at the age of six, going to Memorial Stadium and watching my favorite team, the Minnesota Twins, lose to the Baltimore Orioles as they did throughout my youth. The Orioles were very good. The Twins never were particularly good. But I loved baseball so much and combining with my love of games, I spent far more hours playing dice baseball than I did probably ever going to games. Stratomatic baseball. I know there are some strat fans out there. I played APVA, those who know APPA, pursued the pen that came along in my college years, a very fine dice baseball game and showed the world was getting geekier because pursued the pen. It was played with three different colored, ten-sided dice. And this was clearly a change from the baseball games of our youth with the traditional six-sided die. But I've played them all. I've played a lot more besides shear co. I'm starting to get really obscure. I hope at least one or two of you are still with me. But I loved dice baseball. And I thought I was pretty good at it too. In fact, I hosted a whole league among my high school friends. We should have been studying, but I had everybody with their team playing Stratomatic Baseball. And I kind of, I let it. I don't think I ever won our league, but I was good at it and I really enjoyed it. I still love it today. I still love baseball today, and I especially love board games today. But let me talk about a key moment in my youth where everything, I had one of those, everything changed for me moments. This was one year after college. So I had a very good friend from the University of North Carolina who was in my class, a very talented young man. He was in the same scholarship program I was, the Morehead Kane Scholarship at the University of North Carolina. He was an ingenious guy. And he also loved dice baseball. So we're playing, this is again, after college, a year after college, one night, late at night. And I was probably playing the Minnesota Twins. He might have been playing. I'm going to just say the New York Mets. And he beat me and then he beat me again and then again and again. And I kept playing. And I believe that my friend Jim beat me 10 games in a row. We were burning the midnight oil playing, pursue the pennant baseball. Here's a great word, by the way, Lucubration. We were Lucubrating. That means burning the candlelight and staying up late working. It's a beautiful word. If you didn't know it, there's your word for the week, Lucubration. We were Lucubrating, but it was all about dice baseball. And I stopped somewhere, probably after seven or eight losses to Jim, consecutive losses. I said, Jim, what are you doing? Because I love this. I know this. And you are literally beating me every single time. Obviously, there's some luck in the draw, some bad probabilities working against me. But what is going on? And he said, well, David, look at your leadoff hitter. Your leadoff hitter. Yeah. I was like, yeah, he's a fast guy. So you get him on base, and he's going to be a threat to steal. And the first inning, it's great to have a runner on, and that's where he's like, yeah, but look at his on base percentage. It's like 270. Now, again, I'm not going to define my terms here for those who are not baseball fans. You don't have to learn it. But he was basically looking at the lineup of players that I had selected. And he was saying that I had some of the wrong choices in the lineup. And then I had mis-sequenced them as well. He was getting underneath what I was doing, seeing the strategies, seeing through what I was doing. And he had a flat out, better approach. Probably the teams were about the same, but he just kept beating me. And from that moment, and I had some ego tied up, and I was bruised that night, stumbling back to my car, driving home, dice in hand, cards dropping out of my back pocket. I was bruised that night as I thought about what had happened. And I began to investigate why, why had it happened, and what was Jim teaching me. And that's when I first came across Bill James. And for me, Bill James, who ultimately has been lauded as a profound innovative thinker in baseball, if you read the book Moneyball. If you've seen the movie Moneyball, you've seen references to Bill James. He is the man who, as a man outside of baseball, a writer. Change the game by using the scientific theory and applying it not to biology or physics, but instead to baseball. So in a world in which everyone had typically been taught, that if it's a tie game late in the game and you get a runner on, the right move is to bunt. And that became such so ingrained in America that fathers taught sons that and managers if they didn't, bunt would be questioned by the media afterwards. If they're professionals, they'd be saying, why didn't you bunt? That's the right move to make. And Bill James said, is that really the right move? We've all accepted that wisdom. It's been handed down over a few generations now, but is it the right move to bunt? Again, in baseball, what you're doing is you're sacrificing an out. You have three outs in an inning, and you're saying, we're going to give away an out right now in order to advance our runner from first base to second base to get closer to scoring. We're going to trade an out for one base. And so Bill James simply said, in so many words, and I'm paraphrasing his whole career with this fabled example, he said, rather than assume it's the right move to bunt, why don't we do this? What do scientists do, they make a hypothesis, they gather data, and then they test the hypothesis and come up with a theory. And as it turns out, using the power of computers, the era of the black box, James discovered that the times that teams bunted, on average, over thousands and thousands of repetitions across the history of Major League Baseball, they produced fewer runs than when they did not bunt. It was a profound insight coming from a guy who is completely outside of the establishment. And it took him a couple decades to get enough ears and change enough minds to the point that moneyball would actually be written or made into a great movie, one of my favorite movies. And he just was doing it not just with bunting, but with all aspects of the game, and he continues to do it today. And Bill James is one of my heroes. I've had the pleasure of having a one-hour phone call with Bill James, where he spent most of his time talking about self-driving cars, not even baseball, but he's continued to look at sports and open many people's eyes to smarter thinking about sports. He's also looked at the criminal justice system. He is a wonderful, talented thinker and an American asset. But what was happening for me on that long, late night of dice baseball losing is that my friend Jim had already discovered Bill James and was thinking smarter than I was about what I thought I knew really well, loved, and was good at. Turns out I wasn't that good at it. From that night and those changes and learning more about James and speaking of James, there are two James's here because one is my friend James. I already mentioned Bill James from my friend James. And anybody who's ever read the book, The Wisdom of the Crowds, you now know a little bit more about its author because James Sirwicky, the author of Wisdom of the Crowds, is the friend that I'm talking about right now. One of the smartest guys I know and a wonderful, I used to say young man, but I guess we're all kind of middle-aged. A wonderful man. And so Jim Sirwicky and I had that fun experience of playing lots of games against each other after college. So from this moment, I started learning, you know, you can be smarter about things than the way everyone's thinking. And you don't have to be part of the establishment. And so I started writing. The internet was dawning. In fact, it wasn't the internet yet. The World Wide Web wasn't coined yet as a phrase when I started in 1990, in 1991, using my phone line to dial up with my computer into somebody else's computer. And I began writing and writing online about sports and baseball. And I had gotten the Bill James bug and I was starting to see things in a new way. And I was questioning a lot of assumptions that we're hearing constantly made by announcers, commentators, analysts, sports radio, not just about baseball, but about all sports. So I'm going to mention a basketball one before we close this week, because I'm thinking about it from March Madness, which just ended. But questioning a lot of the received wisdom that we all had and the cliches that so much thinking revolves around when we talk about both sports and investing. So there's the autobiographical piece, and now let's move on to my main and concluding point this week, and I'll preview what we're going to do next week. My main concluding point is hailing back to what I said earlier, the crossover between sports and investing. And why do I love sports so much? And if you do, why do you love spectator sports so much? And how does this relate to our investing? And I think the first thing I want to say is that one thing you have to love about sports is over a very short term period, often somewhere around one to three hours, you're able to see a competition between two or more teams employing often different strategies or approaches, and you're able to watch that competition be scored, and you're able to watch repeatedly winning and losing happen, and you get to draw conclusions about why that's happening. So in a very compact space, you can rapidly simulate different approaches to something and see the results right away. To contrast that with investing, it takes years, I think, for true investing results to play out in your life and mine. The earlier you get started, the sooner you'll get those results. So even though we're always about the long term here, if you're not already investor, I'm here to say again, Carpe DM get started now. While I do talk about results coming in years, the best way to get results in a few years is to already have started or start right now, but in contrast to sports, the stock market isn't going to make you rich, and you're not going to win, and you're not going to have a standing ovation from 50,000 people for what happens tomorrow, or even six months or a year from now. You'll have some good picks and some bad picks as an investor, but it takes quite a while to play this simulation out. Sports, and I'm also going to cross over here to another of my passions, games, board games in particular, board games and card games. You're able to watch again a scored event that's a competition that involves winning and losing. Both are highly responsive to the strategies being employed, and you're able to see the results right then. So you can run through so many more cycles of your thinking as you think through sports or play sports than you can as an investor. That's really highly compelling because we're talking again about you improving your thinking and me improving my thinking as we work together as a rule breakers to figure out the world around us, and if you can find ways to rapidly improve your thinking through more cycles, that's a really great thing. So that's, I think, one of the reasons I really love sports, and another reason I love sports is because the strategies that different teams or players employ do create the results that we see, and the choice of the strategies, the creation of the strategies, inherently an act of creativity itself. In fact, often an act that rewards innovation and what I'll call a rule breaker thinking. Whole new moves, strategies, plays, and plans emerge from organized sports, and we have an opportunity in our armchairs to watch those things play out and see how the inclusion of the three-point shot in basketball fundamentally changes the sport. You know, it wasn't until 1986, '87 that the three-point shot came into major college basketball. That was while I was in college, so some of you will remember there was an era where you couldn't actually shoot a farther shot and get an extra point, but you know, teams that devise strategies around that or ignore it altogether, it's just fascinating to watch those things play out. And to conclude, and to set up next week, there's a lot of bad thinking out there. There is a lot of misunderstanding, a lot of pablum, just kind of mouve by people, going through the motions of analysis, and I'm going to give a quick example, and I'm going to set up next week. Next week, I'm going to take down five really bad sports cliches and relate them to investing. I'm going to try to make you and me smarter through sports as a lens, but I'm going to give one example this week, and I heard it during the final four. Again, if you're a basketball fan, you can appreciate this. If not, I'll be brief. One of the very best players in college basketball, maybe the best player in college basketball, is a guy named Buddy Heald, who played for Oklahoma, and his team made it to the final four of all the teams in this year's men's NCAA tournament. Buddy Heald averaged 25 points a game this year. He won numerous player of the year awards in college basketball, and in his final game, he didn't even score 10 points, and his team was destroyed. In fact, Villanova accomplished something that no team had ever accomplished in the history of college basketball. In a final four game, it beat the other team by over 40 points, the largest win, the largest deficit ever seen in a final four game, and Buddy Heald, player of the year in college basketball, was on the losing end of that game. And here's the cliche that you hear so often in sports doc radio among commentators, and here it is. You ready? Great players show up in great games. For a lot of people, that's an accepted wisdom or truth, and in fact, usually using hindsight, you'll hear a commentator analysts say, yep, you see, great players show up in great games like it always happens, looking backward at a game where it has just happened, however, it often doesn't happen. And when it doesn't happen, no one comes back and says the opposite, like great players sometimes blow it in big games. No one really wants to put that message out there. And so we're left with many half-truths that sound good in certain contexts, but when you pull them out of that context, you end up with something that has very little value. Buddy Heald is a truly great player. Great players don't always show up in great games. And sometimes in the biggest game of his life, the very best player has a very poor game. And he wasn't even the reason his team lost. So that's kind of what I want to do with you next week. I'm going to take down five of these things that aren't from basketball, but just generally from sports. And I want to, I hope, explain why I don't agree with that. And I want to illuminate how you and I as investors can use that kind of wrong-headed thinking to our benefit and think more clearly, because after all as investors, we're not just filling out brackets here. As investors, there's somebody on the other side of the table who wants to buy or sell as the stock that we want to sell or buy. So the smarter you and I can get, more clearly, we can see the better off will be. And I'm going to close by saying that you can do this. Both in sports and in investing, better thinking really is rewarded and you and I can think better. In fact, I don't even think it's that hard to think better. I'll give a quick example from my brother. One of my favorite lines from my brother, Tom Gardner, is regardless of the length of time you hold a stock. If you double that, you'll be a better investor. Regardless of whatever your normal holding period is for a stock, double it. You'll do better. Watch a simple point. Clearly helps many people think better. There is a, sometimes, a distinction between thinking better and then actually being able to act better, but I'm very persuaded you and I can think better and that's what we're going to work on next week. In our two-part series, Sports and Investing on Rule Breaker Investing, I'm David Gardner. Hope you've had a good time. And if you're wearing a sports fan, I'll still try to make it palatable next week. Fool on. As always, people on this program may have interest in the stocks they talk about and the Miley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com [MUSIC] [BLANK_AUDIO]