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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
Above all, Patriots are efficiency experts
ALTHOUGH I’m not a fan of the team per se, I’ve long admired the way the New England Patriots are run.
Like baseball’s Oakland Athletics, the Patriots have found a way to exploit the "inefficiencies" of their market to gain a competitive edge. It’s a lesson that great investors also teach us.
A week ago today, CNBC premiered an interesting one-hour feature on the Patriots: "Touchdown! The Patriots and the Business of Winning." CNBC has been re-airing it.
The show focused on the business success of team owner Robert Kraft and his family. Kraft bought the team in 1994, when the Patriots were a National Football League laughingstock. Now, they’ve won three of the past six Super Bowls and are gunning for another one tonight against the New York Giants. If the Pats win, they’d join the 1972-73 Miami Dolphins as the only teams to go undefeated in an NFL season.
Perhaps Kraft’s best decision as owner has been hiring the controversial yet undeniably brilliant Bill Belichick as head coach in 2000. David Halberstam’s fascinating biography of Belichick, "The Education of a Coach," is well worth reading.
Under Belichick, the Patriots have ruthlessly exploited the league’s free agent system to gain an edge. They’ve refused to grant bloated contracts to overvalued veterans, instead pouncing on overlooked or cast-aside talent such as Randy Moss, Wes Welker and Junior Seau.
They also had the foresight to select quarterback Tom Brady in the sixth round of the 2000 NFL draft, although the fact that they skipped over him five times suggests a bit of luck as well.
Great stock-market investors such as Berkshire Hathaway’s Warren Buffett work in a much different arena, but use similar tactics to acquire outstanding values. Like the Patriots, these investors snap up cast-aside but solid businesses that the market undervalues.
One final example of this technique: baseball’s Oakland Athletics, as portrayed in Michael Lewis’ "Moneyball."
As a small-market team, the A’s don’t have the financial means to attract high-dollar free agents. Instead, they find talent by drafting well, signing undervalued free agents, and shipping off established talent for promising youngsters once the veteran players get too expensive. They’ve developed sophisticated statistical analysis techniques to evaluate players.
Granted, the A’s haven’t had the kind of success that the Patriots have, but the fact that they make the playoffs most years is a tribute to their innovative ways. The Minnesota Twins are another team that falls into this category. Sadly for these smart mid-market teams, clubs with better financial resources such as the Boston Red Sox are now also using the statistical methods.
Economists call markets that mostly work well "efficient." Millions of investors studying the stock market make it mostly efficient. The same seems to be mostly true for professional sports.
Yet the truly smart investors and teams–such as Buffett, the Patriots and the A’s–can exploit the small inefficiencies that do exist and rise above the field.
Searching for companies or fund managers that share these characteristics would seem like a wise move for investors.