Editors' pick: Originally published Dec. 6.
If anyone can find common ground between the Chicago Cubs' World Series strategy and investment strategies, it is author Michael Lewis.
This keen observer of sports and money sees the Cubs' first championship in 108 years much the same way that he sees investing: It is neither a random effort nor a grand slam but instead a matter of using data and process to make better long-term decisions.
Lewis wrote about this same theme -- how information levels the playing field -- in his first book, Liar's Poker.
The lesson learned from this book then still holds true: Investors always face unclear, unfair or unproductive options. They must think for themselves, ask questions and not take the word of "experts" on faith.
These were the same themes that Lewis discussed at a recent talk in Chicago for Origin Investments, where he maintained that investment strategies and portfolio analysis are as important in baseball as in personal finance.
"The market for baseball players has gotten a lot more efficient in the last 10 years. There's still smart and dumb management, but the differences are not as great," said Lewis, who also wrote The Blind Side and the newly released The Undoing Project.
What does matter is the way that managers understand strategy and deploy money, said Lewis, who wrote Moneyball, the definitive book on baseball and finance.
It disclosed the secret of Oakland Athletics General Manager Billy Beane, who signed players the way a value-oriented portfolio manager plots investment strategies, The Wall Street Journal said.
Research into the logic behind his success with a low-payroll squad led Lewis to Boston Red Sox owner John Henry and his protege Theo Epstein, now the Chicago Cubs president of baseball operations.
It was a secret that Henry and Epstein wanted to keep.
"They took me to lunch and asked what they needed to do for me not to write the book because they were about to do the same thing in Boston but with money," Lewis said before the Origin Investments audience. "And they didn't want the market to know how stupid the market was."
Irrational markets have always been a focus of Lewis' writing.
In exposing the sales culture at Salomon Brothers, Liar's Poker showed Wall Street bond traders as riding a wave of blind luck. The heroes of The Big Short and Flash Boys see clear warning signs that the smart money ignores.
Lewis' new book, The Undoing Project, digs deeper into behavioral psychology and why smart people ignore statistically proven evidence and make bad decisions based on gut. Taken together, these books make a seminal point: Successful investing requires a disciplined process.
Here are six ways that real estate investors can use the points Lewis told the Origin Investments audience in their own investment strategies.
1. Be ready to change your lineup. Although baseball players often enjoy long-term contracts that reward them for past performance, Beane signed one- or two-year deals with veterans who showed immediate productivity. Likewise, investors should remember not to fall in love with specific assets in their portfolios.
A property may show its fastest appreciation in just a few years' time. While it may continue to bring in steady rents, its timetable for maximum appreciation might be much shorter.
Strategic private-equity real estate managers know how to minimize risk and maximize investment value.
2. Don't be scared off by shortcomings. Beane was successful with players that other teams had discarded because of factors such as age, awkward mechanics, injury or lack of speed, according to the Bay Area's Mercury News.
But those players had talents that the Oakland A's needed or that could be improved.
Similarly, value investors look for companies with fixable problems or properties that have been overlooked due to age, management or marketing issues.
In real estate, this is known as value-added investing. Thoughtful and strategic business plans can turn around undervalued assets.
3. Don't follow the herd. Moneyball shows investors that information doesn't make a market efficient. It is what is done with the information that counts.
Beane and Epstein used statistics widely available to fellow general managers, who instead trusted traditional scouting reports.
The same can be true of investment strategies. Profitable choices often are ignored in popular vehicles such as index funds.
Investors can't beat the market if they mirror the market. Investors can diversify a portfolio with alternative investments such as commercial real estate, which isn't correlated to public equities.
4. Don't trade at the deadline. Beane signed deals throughout the year, rather than at the last minute when bidding was fiercest.
And as he told ESPN, "I don't want to make decisions based on micro-events" or "the small sample size. Do you think Warren Buffett sits around and watches Berkshire Hathaway stock every day?"
The price swings of stocks and bonds show that investment markets constantly overreact to new information. Smart investors anticipate market changes rather than reacting to them.
Choosing less volatile alternatives, such as commercial real estate, will give a portfolio added protection compared with frequently traded real estate investment trusts.
5. Look for a track record. Beane drafted players out of college rather than high school, looking for experience that could translate to the big leagues, according to ESPN.
It is best not to choose investments based on a single top-rated performance because it is unlikely to be repeated, compared with one that has rated near the top for several years. Similarly, in real estate we don't judge an investment's projected internal rate of return without comparing projected and actual internal rates of return for a manager's past choices.
6. Measure the right things. The Moneyball approach picked players based not on their batting average but their on-base percentage, since walks proved as useful as singles. Real estate investors looking to build wealth might want to focus not on the internal rate of return alone as much as types of risk and multiple on equity, the degree to which property values are expected to rise.
This article is commentary by an independent contributor. At the time of publication, the author was a principal in a private-equity commercial real estate investment firm.