Friday, January 11, 2008

Evaluating Companies...Lessons from the Jim Rice Debate

This week, Jim Rice, a famous Boston Red Sox slugger of the 70s and 80s, was denied entry into the Hall of Fame once again. To explain this, many sportswriters point out that he "only" hit 386 career home runs. Yet, he played when hitting thirty home runs in a season actually meant something. Many others have played during a more recent era in which balls have flown over the fences at an unprecedented rate. Rice was one of the game’s most feared hitters for a decade. How should we measure his performance? For starters, we should not focus on raw numbers alone, because today’s offensive numbers are grossly inflated relative to the 1970s (thank you, steroids and HGH). Instead, we ought to see how a player fared relative to others who competed during the same era.

Let’s see how Rice stacks up . One good measure of preeminence in a particular era is the Most Valuable Player award voting. Right away, we see a stark contrast between Rice and many other great ballplayers. Jim Rice earned one MVP award, but he also finished in the top five in the MVP voting on six separate occasions - a remarkable feat. To put this in perspective, Rice finished in the top five more often than many Hall of Famers including Reggie Jackson, Willie McCovey, Willie Stargell, Dave Winfield, George Brett, Tony Perez, and Boston's own Carl Yastremski!

Why do I bring up the example of Jim Rice? For one, I'm a Red Sox fan who believes that it is wrong for him to have been repeatedly denied entry into the Hall of Fame :-) However, I also bring up Rice's case because, too often, journalists, students, and practicing managers make the mistake of looking at company's financial results in isolation, rather than thinking about how they are doing relative to their competitors. They make the same mistake that sportswriters have made with regard to Rice.

With the economy slipping perhaps into recession, many firms are experiencing a deterioration in their financial results. The key question, however, is this: Are some firms able to weather the storm more effectively than others? The headlines shouldn't be: XYZ retailer experiences downturn in comparable store sales growth. Why is that newsworthy these days? Almost all retailers are experiencing softness in their numbers. What we really want to know, particularly as investors, is this: Is XYZ retailer experiencing more or less of a downturn in performance relative to its rivals? Too often, articles fail to explore this very important comparative data.

1 comment:

Marcus Gary said...

Great point, Professor Roberto - I like the reasoning.

As another good comparative stat, adding to your overall thrust, Rice led his league in total bases four times. Only eight players have done that four or more times. They are all Hall of Famers and in fact with one exception are considered the elite of the Hall of Fame:

Players Who Led Their League in Total Bases Four or More Times
Hank Aaron - 8 times
Roger Hornsby - 7
Babe Ruth - 6
Stan Musial - 6
Ted Williams - 5
Alex Rodriguez - 4
Lou Gehrig - 4
Chuck Klein - 4
Jim Rice - 4

Jim Rice is the only person on that list who is not in the Hall of Fame.

Even the six players who led their leagues in total bases three times help make the case that comparative stats are where it's at. Of the three-time total base leaders, four are famous stars in the Hall: Joe DiMaggio, Joe Medwick, Willie Mays and Duke Snider. The fifth, Albert Belle, had his career cut short, while the sixth, Dave Parker, suffered from on-the-cusp stats acquired over a long career and a bad image due to his cocaine problems.

The Rice case also demonstrates the recency effect. People tend to evaluate past performance based on the performance and metrics they've seen most recently. So Rice gets evaluated on the roided-up stats of the 1995-2006 era, which deals him a double blow.

He further suffers, unfairly, from his home run short fall. Mickey Mantle hit about 150+ more HRs than Rice and definitely has the image of being a superior slugger. But Rice has better per season averages than Mantle in total bases (Rice is No. 18 all-time, Mantle No. 28) and RBIs (Rice is No. 20 all-time, Mantle No. 41) (In defense, Mantle played 18 season and Rice 16, so the Mick has an edge in cumulative stats, and he fielded a tougher position, better, for much of his career.)

Because Mantle hit a lot of HRs, especially for his era, however, he is considered a more glorious player than Rice, even though statistically speaking Rice was his equal or superior.

The business world has its home runs as well - the splashy moves that get all the attention.

Bottom line: If Warren Buffett was in charge of Hall of Fame selection, Jim Rice would be in Cooperstown.