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What Baseball Can Teach You About Investing

Written by Briton Ryle
Posted February 28, 2018 at 8:43AM

This is normally my favorite time of year. Yeah, winter's winding down. We've already had a couple days that were warm enough for me to get out on the golf course. But mostly, it's because the boys of summer have reported to camp, and spring training games have already started. 

Yes, I am a huge baseball fan. I remember the first time I walked into Camden Yards in 1998 like it was yesterday. It was the year after the Os’ wire-to-wire season. They led the AL East from day one, but lost the ALCS in six games to the Cleveland Indians. Expectations for the Orioles were high that year. But what I remember most was how green the outfield grass was. Seemed like it was glowing...

I went to a bunch of games that year. And really, it was a perfect introduction to Baltimore baseball. Because, for all the preseason expectations, the Orioles finished fourth out of five teams in their division. They wouldn't sniff the playoffs for 14 years...

The Orioles were so badly run during those Dark Years that it was comical. Other teams lined up to do deals with GM Syd Thrift because he would trade established Orioles players for other teams' scrub no-names... and not even get physicals done. And on the rare occasion they got somebody who could play, they'd hype the guy up like he was the second coming of Cal Ripken, Jr. At least I did get to see Cal play for a few years...

So, in 2010, the Orioles hired Buck Showalter to manage the team. Of course, they first tried to get Bobby Valentine, but he declined, went to the Red Sox, was such a jerk that he got fired, and hasn't put on a uniform since. In other words, the Orioles got lucky. But let's keep the narrative positive here. Because Buck brought something to springtime in Baltimore that it hadn't had in 14 years: anticipation. 

Spring training is all about possibility. Your team's got a couple new players that should help. Maybe there's a rookie from the farm system making waves, a budding superstar. Fans project that if one or two pitchers can win just three more games, the team can make it to the World Series. This is why they say everyone is a contender in March...

Unless you're a Baltimore Orioles fan.

The Nature of Risk

Like every other baseball team owner, the Orioles’ owner, Peter Angelos, is a billionaire. He's loaded. But he has a terrible understanding of money and value. For years, the Orioles’ mantra for building and maintaining a winning team has been "buy the bats, grow the arms."

In other words, the Orioles are fine with spending some loot on position players who can hit (the bats). But they aren't going to spend big money to get free agent pitchers to come to Baltimore. The want their pitchers (arms) to come up through the farm system. 

The reason for this policy seems sound. Top-tier pitchers tend to get long-term contracts for over $20 million a year, and they tend to get hurt. It sounds reasonable. Why risk millions on a player who might get hurt and might not even be pitching in a few years? 

The truth is, any player can get hurt. Pitchers may be more prone to injury because the human arm is simply not designed for the repeated stress of throwing a baseball. But every team in Major League Baseball faces this risk. The Orioles aren't smarter than other teams because they won't pony up for top pitching talent. In fact, their strategy of getting mid-tier talent at a lower price and then hoping for upside has gotten them just about what you'd expect: crappy pitching. 

In 2014, the Orioles signed pitcher Ubaldo Jiménez to a four-year, $50 million contract. In 2010, Jiménez was an All-Star, with a win–loss record of 19–8. In 2011, he went 10–13. In 2012, 9–17. Seems to be a trend, right? But in 2013, he had a fantastic second half of the season and finished 13–9. That was enough to make the Orioles think they had a great turnaround candidate. 

Rather than look at the two straight years where his numbers steadily declined, the Orioles chose to focus on the half-season where his numbers got better. That $50 million wager was then a bet that Jiménez would be better for four years. It was also a bet on the whole team's success. If Jiménez couldn't get it turned around, the team would struggle to make the playoffs. 

Jiménez won just six games in 2014, but the Os still made the playoffs. The Os made just one other postseason while Jiménez was on the team, 2016. They had a one-game Wild Card playoff game with the Toronto Blue Jays that was tied after 10 innings. Guess who gave up the game-winning home run to Toronto in the 11th? 

Yeah, you can't make this stuff up. Jimenez threw nine pitches, put two men on base, and then served up the home run. Sheesh. 

If you ask me, the Orioles got exactly what they deserved. 

And for investors, there is a terrific lesson here...

"Money Is What You Spend, Value Is What You Get"

That's a Warren Buffett quote. If I could, I would sit down with Orioles management and explain to them that their misunderstanding of value has cost the team dearly. But after hundreds of phone calls and a court order telling me that I can't go within 100 yards of the Orioles General Manager Dan Duquette, I'll tell you how misunderstanding value can cost your investment portfolio dearly.

During Jiménez’ tenure with the Orioles, they had the best closer in baseball, Zach Britton. They had the home run leader in three of those four years. They had All-Stars at several positions and Golden Glove players in center field, at third, and at shortstop. And it was all wasted because of crappy pitching.

That’s four years of these guys’ careers. And four years of their salaries, too, down the tubes because the team thought it was "too risky" to spend money on pitching. 

This isn't just theoretical. It has actually cost the Orioles $45 million. Attendance at Camden Yards peaked in 2014 at 2,464,473. It fell to 2,281,202 in 2015, followed by 2,172,344 and 2,028,424 in 2016 and 2017. 

I can't tell you that the only reason 911,449 fans didn't buy tickets in 2015–2017 was because the pitching stunk. But I know it was a factor. And if you figure each of those fans would've spent $50 at a game, that's $45.5 million in lost revenue. I'm just spitballing here, but maybe spend a little more on pitching, and maybe you don't lose that $45 million?

When you go to buy a stock, don't do what the Orioles do. Don't buy a loser and think it's got turnaround potential. Buy stock in companies that have proven they can grow. I have no problem buying cheap, small stocks that have "potential" like penny stocks. But don't build your portfolio around them. That's a recipe for disaster.

When you're investing, you will get what you pay for. If you buy shares in volatile stocks, you'll get volatility. If you buy stocks that consistently grow revenue and profit, guess what? Your investment will grow consistently, too.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.


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