Tebow is not the only quarterback who comes to mind. Ever hear of a guy named Joe Montana? Montana played at a little known football college called Notre Dame. He was recruited by ND, but in 1977 at the beginning of his fourth year in the program (an injury gave him five years of eligibility) Montana was still listed third on the depth chart behind Rusty Lisch and Gary Forystek.

ND started the season 1-1 in 1977 and Montana did not play until there were eleven minutes left in the third game of the season with ND trailing by more than a touchdown. He rallied ND to a victory (Data provided by Wikipedia) and never lost his starting job after that. In fact, ND did not lose another game that year after he got the chance to play.

ND finished 1977 with a win in the Cotton Bowl over then-number-one ranked University of Texas and ND was voted the National Champions. All Montana did in college was win, usually late as he led his team in one comeback after another.

You would think that such a clutch performer who led his team to a National Championship would be viewed favorably by the experts in the NFL, but the scouts did not think very highly of Montana. They ranked his arm strength as particularly weak. So, the following quarterbacks were drafted ahead of Montana:

First Round: Jack Thomson, Phil Simms, Steve Fuller 

No other quarterbacks were chosen in that draft until Montana was taken with the last pick in the third round, number 82 overall. All Montana did in the NFL was win four Super Bowls, win three Super Bowl MVP awards, get selected for eight Pro Bowls, and get elected to the NFL Hall of Fame. He is widely considered to be the greatest quarterback of all time.

Okay, so maybe you heard of Montana, but have you ever heard of a guy named Tom Brady? I will admit I did not like the guy until this year when I saw an ESPN film called “The Brady 6.”  It is the story of Brady and the six quarterbacks who were drafted ahead of Brady in the 2000 NFL draft.

You can and should watch “The Brady 6″ on YouTube (I embedded part I below), so I will not bore you with Brady’s story here. But, I found one thing especially noteworthy: the experts at the NFL combine had ranked 576 college quarterbacks in the speed and agility categories in the multi-decade history of the NFL Combine. Brady’s overall ranking in the history of the combine was 576.

The football experts rely on these combine numbers the way baseball scouts heavily rely on batting average for hitters and velocity for pitchers; the way fund analysts rely on pedigree for performance prospects and beta for risk measurement. Oh, and the experts all felt that Brady had poor arm strength.

The two quarterbacks who earned 100 wins in their careers in the fewest number of starts were Joe Montana and Tom Brady. Watch the Brady 6; it may forever change the way you think of experts in sports and elsewhere.

Today, we have Tebow, who is being criticized for a supposed lack of NFL-caliber skill, and the criticism is often nasty. The silence from Denver’s front office, scouts, and coaching staff has been deafening. It should be noted that Tebow was drafted by a different front office and coaching staff from the current one in Denver.

Yet, today I found out that Tebow is 4 -3 5 – 2 (5-3 6 – 2 after the win against the Jets) in his first seven starts in Denver compared with Hall-of-Famer John Elway’s 1 – 6 record in his first seven. Tebow is now 4-1 this year after Denver started 1-4 without him and he has Denver in the playoff hunt. Tebow has something like eight touchdowns to one interception in that seven game span and Elway had those numbers reversed. The knock on Tebow has been that he does not have the arm strength to be an NFL quarterback. It sounds familiar.

Maybe the experts will have gotten this one right in the end. After all, Tebow did have more success in college than Montana and Brady; he did win two National Championships at The University of Florida and a Heisman Trophy. And, unlike Montana and Brady, Tebow was taken in the first round of the NFL draft.

I am choosing NFL quarterbacks for this criticism of experts, but you could pick any position in the NFL, or any position in any other sport, and you will find that experts often get it wrong. Or, you could choose experts in any field from finance to climate science. Many are not just proven wrong, but fantastically wrong. Perhaps it is because those who are deemed experts are usually the ones who are the most sure of themselves; they make the best media, board room, or draft room presentations, but perhaps they are not necessarily the best at understanding talent or analyzing complex phenomena. Often times, the one who is the most aggressive and talks the loudest wins the day.

Michael Lewis’s great book Moneyball is all about experts who get it wrong, leaving cheap bargains available for savvy analysts who can see through the nonsense. Here are some reasons that experts make mistakes in evaluating baseball talent: evaluating a player based on whether or not he has a square jaw (“a baseball face”); whether he looks good in jeans; or whether he has a pretty girlfriend. That is the kind of analysis that experts provided before Moneyball, and many still have similar biases.

One such bias in baseball that has not disappeared is a bias against “soft tossers;” i.e. pitchers who cannot consistently break 90-miles per hour on the radar gun. Remind you of the supposedly weak arms of Montana, Brady, and Tebow? Baseball pitching experts are enamored with velocity and are blind to practically every flaw in a pitcher who can throw hard. But, if a pitcher does not throw hard they will ignore him even if he has few flaws, even if he can knock a fly off a catcher’s mitt, make the ball move, change speeds, and collect wins. Never mind that the greatest pitcher in the last thirty years rarely used velocity to get hitters out, but could hit practically every spot he wanted to within an inch or two, move the ball, and change speeds: five-time Cy Young winner Greg Maddux.

So, should we rely on experts to the degree that we do? Warren Buffett points out that  experts concluded that his and other value investors’  accomplishments were either lucky–like a coin flipper who gets heads twenty times in a row–or that there is just not enough data to evaluate their success. His now-famous story is of 225 million orangutans spread evenly throughout the country who mindlessly flips coins; by sheer luck 215 of them will get heads twenty times in a row. But, he says that if forty of those 215 orangutans are from the same zoo, maybe they are on to something.

Were the experts right, but the outlier successes of the Montanas, Bradys, Madduxes, Buffetts, Klarmans, and Einhorns to be expected as merely the lucky random ones who fell under the far reaches of the bell curve?

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Lewis writes, almost smirkingly, that Bass was so concerned about a financial collapse that he was literally buying nickels–TWENTY MILLION of them–because the value of the metal in the coin was worth more than five cents. The implication being that there may be little else that retains as much value as such hard assets after a collapse.

Four years later Lewis wonders how Dallas resident Bass got almost everything so right, while experts in financial centers around the world got everything so wrong.

They are still not getting it:

H/T for pointing to the video: Santangel’s Review (Resources to the right)

It would be hard to guess given his mild and erudite demeanor in this video, but Bass is a shotgun-toting Texan who lives in a “fort” and drives a Hummer with a bumper sticker that says: “God Bless Our Troops, Especially Our Snipers.” God Bless indeed.

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http://www.vanityfair.com/culture/features/2011/12/michael-lewis-201112

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Mets will pay 3 percent interest to investors
http://www.nypost.com/p/news/business/mets_next_pitch_WTbeypwaj93Lp1Mb58gOQN#ixzz1cr5G1BU4

Mets lay off 10 percent of staff

http://www.nypost.com/p/news/local/queens/front_office_met_ax_uFsH3565WnN4JOaARQlTvJ

If Reyes waits, he’ll get big bucks — but not from Mets

http://www.nypost.com/p/sports/mets/trickle_down_economics_G5wFhNifw09CEk4T1NzDSP#ixzz1cr6V5yAp

When David Einhorn offered to save the Wilpons by buying a minority stake in the team, I thought Einhorn had lost his mind. What value investor would offer up so much for so little in return, even one who loved the Mets? But, I was obviously not privy to the negotiations. Einhorn wisely sought a return of his capital in a set time frame or it would spring a majority ownership position in the team. And, even after the Wilpons returned Einhorn’s capital, Einhorn would keep his minority ownership position. Now THAT is a proper value investment.

I suspect that once Major League Baseball is finished cleaning up the mess in Los Angeles, they will focus on cleaning up the mess in Queens. The Mets owe many people a lot money, and it is money the Wilpons have little hope of acquiring after rejecting Einhorn. Einhorn may wind up as the managing partner in the Mets soon enough.

The Wilpons were dumb for rejecting Einhorn’s offer. One-hundred percent of nothing is less than a lesser percentage (greater than zero) of something. But, dumb has been their M.O.: One championship in thirty-one years for a major market team with a team-related cable channel and no salary cap restrictions is a major failure. How bad are the Wilpons in running a baseball team?

Some accounts said former Mets joint owner Nelson Doubleday had to overcome a Wilpon veto of the Mike Piazza trade in 1998 because Wilpon did not want to pay Piazza’s salary. Piazza is largely credited for the Mets perennial playoff runs from 1998 to 2003 and those runs were instrumental in bringing in a lot of cash. But, the epitome of the Wilpons’ failure came when they traded Mike Cameron before the 2006 season.

Cameron was a Gold Glove centerfielder who could hit and hit with power. They got rid of him in order to save $8 million in salary, which they had in spades at the time because–thanks largely to Piazza in the years before–the Mets were competitive. They were built to win a championship in 2006 except for the fact that they had no one to play a decent rightfield. While it is true that value investors would rather hold on to their cash than spend it unnecessarily, the good ones usually do a great job of separating necessary expenditures from unnecessary ones.

Halfway through the 2006 season the Wilpons scrambled to find someone who could play rightfield who could hit. They settled on Shawn Green–a long-swing, ageing hitter who played a clumsy outfield–and paid him Mike Cameron money. So much for saving a few bucks. The Mets reached the NL Championship Series in 2006 against the Cardinals–one step from the World Series–and had home field advantage. They lost to the Cardinals in seven games and the Cards went on to win the World Series. A big part of the reason that they did not dispatch the Cardinals in five games was the poor outfield play of Shawn Green. Meanwhile, Mike Cameron won his third Gold Glove in 2006 while playing outfield for the Padres.

The Wilpons tried to save a few pennies in 2006 relative to the dollars of salary they were paying for a championship-caliber team and blew it. They failed to see that the return on Cameron’s $8 million would have exceeded the cost by multiples with a World Series title. They failed to see that paying Cameron’s salary was a necessary expense. The Cameron episode was typical of their operation. The Wilpons tried to save a few pennies in their negotiations with potential minority partners in 2011 and are blowing it again, but this time it is a good thing for Mets’ fans.

Update 11/6: Today’s headlines indicate they are open to trade offers for David Wright, and some Mets executive was quoted anonymously saying they hope to have a winning team again by 2014.

The Mets did one thing correctly, but I am not sure how much of the credit should go to the Wilpons and how much to Major League Baseball, which cannot afford another mismanaged debacle in a major league team. The Mets hired three front office leaders who were instrumental in bringing Moneyball to the majors and were highlighted in Michael Lewis’s book: They are Sandy Alderson, the General Manager who was previously an executive with Major league Baseball in Manhattan and who hired Billy Beane for the A’s front office and taught him how to be a GM; JP Ricciardi, former Blue Jays General Manager; and Paul DePodesta VP in charge of Mets player development. The Mets finally have a philosophy; a roadmap. That is a good thing even if they will not be competitive for several years.

Moneyball is value investing.

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The plan is amusing to me, though I should not feel amused at all today because my net long exposure is the lowest it has ever been. That means that we are only minimally participating in the euphoric 13% rise in the US equity markets this month…a moon shot, really. In fact, we used today’s blast off to sell out of some long-held positions because they reached our estimate of intrinsic value. At this rate, we could be net short by the end of the year.

If the market holds here, it will be the market’s best month since an 11% rise in December of 1991. For some perspective, in December 1991, the eastern European countries were becoming acclimated to their new-found freedom and it was shortly after the US and coalition forces defeated the Iraqi army in Operation Desert Storm with minimal resistance. So, it was a time of great optimism. In fact, the market rose 31% that year. (Update: Jason Zweig just re-tweeted (http://twitter.com/#!/jasonzweigwsj): “Only 2 months since 1950 where S&P 500 has been up, for the month, more than current MTD – Jan 1987 & Oct 1974 (+13.2 & +16.3%, respectively)”)

The most amusing thing about the optimism surrounding the bailout plan is how much work is left to be done. The first thing I thought about when I heard the details (or lack of details) is Steve Martin’s SNL monologue in January 1978:

You.. can be a millionaire.. and never pay taxes! You can be a millionaire.. and never pay taxes!

You say.. “Steve.. how can I be a millionaire.. and never pay taxes?”

First.. get a million dollars.

Now.. you say, “Steve.. what do I say to the tax man when he comes to my door and says, ‘You.. have never paid taxes’?” Two simple words. Two simple words in the English language: “I forgot!”

When the Euro ministers go to the Chinese to get a trillion euros, will the Chinese actually give it to them? Details. And, if they do, and the Chinese come knocking on their door later to retrieve their capital along with a hefty return, will the ministers simply say, “I forgot?”

As Bob Pisani said today on CNBC, Italy is due to roll over 200 billion euro of debt early next year, which equals all of the capital that was dedicated to the EFSF last night. Details.

I have analyzed risk my entire career. The following is the first question that people like me ask when someone comes to us with a deal that the seller considers too good to pass up: “Why am I so special that I am going to get access to this great opportunity? What is it that I can bring to the table that makes me special?”

If you can only bring money to the table, then look out because money is completely fungible and they must think that you are the mark. The European ministers must be hoping that the Chinese and others don’t ask that question. Either that, or the Chinese (and others) are about to buy at very low prices some Greek Islands, the Vatican, the south of France, the Louvre, Daimler and BMW, some patented British and German aerospace and defense technology, and a few other Euro businesses, intellectual property, and hot spots.

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One week later and the market is up over 12% since 3:15 pm on October 4 (as I write this). Based on what? As best as I can, tell the reason behind the forty-five minute swing on October 4 was, 1. a rumor that leaders in Europe had; 2. a plan to make; 3. a plan to fix the European debt crisis. The reason for the over-8.5% spike since October 4 is that the rumor was true: Sarkozy and Merkel are planning to make a plan. The details will be out soon; just you wait and see.

For even more perspective on Europe’s looooong-term problem, read Michael Lewis’s excellent Boomerang: Travels in the New Third World. You can find it in the Value Investing Bookstore tab above.

All other economic and financial news since 3:15 pm on October 4 has been mixed at best and slightly worrisome at worst. There are two things on which I think investors must place more weight: First, public and private debt-to-GDP levels have exploded to record levels in advanced economies. Given a 12% spike in equity prices in one week, market players must be expecting much more economic growth than they did before October 4, so the other item on which investors must place more weight is Rogoff and Reinhart’s conclusion to their paper, A Decade of Debt (http://papers.nber.org/papers/w16827):

The sharp run-up in public sector debt will likely prove one of the most enduring legacies of the 2007-2009 financial crises in the United States and elsewhere. We examine the experience of forty four countries spanning up to two centuries of data on central government debt, inflation and growth. Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. Much lower levels of external debt/GDP (60 percent) are associated with adverse outcomes for emerging market growth. Seldom do countries grow their way out of debts. The nonlinear response of growth to debt as debt grows towards historical boundaries is reminiscent of the―debt intolerance phenomenon developed in Reinhart, Rogoff and Savastano (2003). As 44 countries hit debt intolerance ceilings, market interest rates can begin to rise quite suddenly, forcing painful adjustment.

For many if not most advanced countries, dismissing debt concerns at this time is tantamount to ignoring the proverbial elephant in the room. So is pretending that no restructuring will be necessary. It may not be called restructuring, so as not to offend the sensitivities of governments that want to pretend to find an advanced economy solution for an emerging market style sovereign debt crisis. As in other debt crises resolution episodes, debt buybacks and debt-equity swaps are a part of the restructuring landscape. Financial repression is not likely to also prove a politically correct term—so prudential regulation will provably provide the aegis for a return to a system more akin to what the global economy had prior to the 1980s market-based reforms.

The process where debts are being placed at below market interest rates in pension funds and other more captive domestic financial institutions is already under way in several countries in Europe. Central banks on both sides of the Atlantic have become even bigger players in purchases of government debt, possibly for the indefinite future. For the United States, fear of currency appreciation continues to drive central banks in many emerging markets to purchase U.S. government bonds on a large scale. In other words, markets for government bonds are increasingly populated by nonmarket players, calling into question what the information content of bond prices are relatively to their underlying risk profile—a common feature of financially repressed systems.

The data:

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Lewis, of course, wrote the book Moneyball in 2003. It is a book about baseball that, in its essence, is a book about value investing. Needless to say, I loved the book. I will let you know if the movie lives up to the book.

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I had gone to see Germany’s deputy minister of finance, a 44-year-old career government official named Jörg Asmussen. The Germans are now in possession of the only Finance Ministry in the big-time developed world whose leaders don’t need to worry whether their economy will collapse the moment investors stop buying their bonds. As unemployment in Greece climbs to the highest on record (16.2 percent at last count), it falls in Germany to 20-year lows (6.9 percent). Germany appears to have experienced a financial crisis without economic consequences. They’d donned head condoms in the presence of their bankers, and so they had avoided being splattered by their mud. As a result, for the past year or so the financial markets have been trying and failing to get a bead on the German people: they can probably afford to pay off the debts of their fellow Europeans, but will they actually do it? Are they now Europeans, or are they still Germans? Any utterance or gesture by any German official anywhere near this decision for the past 18 months has been a market-moving headline, and there have been plenty, most of them echoing German public opinion, and expressing incomprehension and outrage that other peoples can behave so irresponsibly. Asmussen is one of the Germans now being obsessively watched. He and his boss, Wolfgang Schäuble, are the two German officials present in every conversation between the German government and the deadbeats.

The following from Lewis is a gem, especially when reading it in conjunction with Howard Marks’s latest memo (“Down to the Wire” July 2011):

 The curious thing about the eruption of cheap and indiscriminate lending of money during the past decade was the different effects it had from country to country. Every developed country was subjected to more or less the same temptation, but no two countries responded in precisely the same way. The rest of Europe, in effect, used Germany’s credit rating to indulge its material desires. They borrowed as cheaply as Germans could to buy stuff they couldn’t afford. Given the chance to take something for nothing, the German people alone simply ignored the offer. “There was no credit boom in Germany,” says Asmussen. “Real-estate prices were completely flat. There was no borrowing for consumption. Because this behavior is rather alien to Germans. Germans save whenever possible. This is deeply in German genes. Perhaps a leftover of the collective memory of the Great Depression and the hyperinflation of the 1920s.” The German government was equally prudent because, he went on, “there is a consensus among the different parties about this: if you’re not adhering to fiscal responsibility, you have no chance in elections, because the people are that way.”

Lewis: http://www.vanityfair.com/business/features/2011/09/europe-201109

Marks: http://www.oaktreecapital.com/memo.aspx

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