Lessons the Chicago Cubs Can Teach Investors
The Chicago Cubs’ 108-year journey to its World Series championship this year provides some lessons about strategic investment strategies that can be applied to the real estate industry, says David Scherer, cofounder of Chicago-based private equity firm Origin Investments. Theo Epstein, president of baseball operations for the Cubs, learned these lessons from Billy Beane, general manager of the Oakland Athletics and Boston Red Sox, which were then chronicled in the book Moneyball. How can you and your clients compare real estate investment to baseball? Here are Scherer’s six real estate lessons from the Cubs:
- Don’t follow the herd. Moneyball shows investors that information alone doesn’t make a market efficient; it’s what you do with it. 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 is not correlated to pubic equities.
- Be ready to change your lineup. While baseball players often enjoy long-term contracts based on past performance, championship-caliber teams are buoyed by veterans who show immediate productivity even when inked to short-term deals. 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.
- Don’t be scared off by shortcomings. As a GM, Beane, and then Epstein, were successful with players other teams had discarded because of age, injury, lack of speed, or awkward mechanics. But those players had talents that were 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.
- Don’t trade at the deadline. The best deals made by championship teams are those made throughout the year, not just at the trading deadline when bidding is fiercest. Beane once told ESPN, “I don’t want to make decisions based on micro-events [or] the small sample size.” In investing, the price swings of stocks and bonds show that 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 to frequently traded REITS.
- Look for a track record. Like Beane did years before, Epstein drafted out of college rather than high school, looking for experience that could translate more closely to the big leagues. It’s best not to choose investments based on a single top-rated performance — it’s unlikely to repeat, compared to 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 (IRR) without comparing projected and actual IRRs for a manager’s past choices.
- Measure the right things. The Moneyball approach picked players based not only 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 IRR alone as much as types of risk and multiple on equity, the degree to which property values are expected to rise.
Source: David Scherer, cofounder of Origin Investments