The Major League Baseball League Championship Series are going on this week in both the National League and the American League, and it occurs to us that there is an investment lesson (probably several investment lessons) in the various matchups taking place.
One of the most striking contrasts to us as portfolio managers is the difference between the San Francisco Giants, playing the Philadelphia Phillies for the National League Championship, and the New York Yankees, playing the Texas Rangers for the American League Championship.*
The Yankees are well-known as a team which habitually acquires big-name players from other teams, while this-year's San Francisco Giants team -- and especially their well-respected pitching staff -- is very much a product of players the Giants developed themselves within their own farm system.
Many of the Yankees stars were bought with the offer of a huge salary rather than brought up inside the Yankee system, including Alex Rodriguez, CC Sabathia, Mark Teixeira, AJ Burnett, and Lance Burkman (Derek Jeter being a notable exception, as is young pitcher Phil Hughes). This situation is no surprise for followers of baseball, as the Yankees have been known for this strategy for years.
In contrast, the Giants team largely grew up within the Giants system. Starting pitchers Tim Lincecum, Jonathan Sanchez, Matt Cain, and Madison Bumgarner all came up through the Giants farm system and played AAA ball with the Giants organization in Fresno, as did stellar rookie catcher Buster Posey.
We've made the point before that there are interesting portfolio management lessons to be learned from sports, particularly from baseball (see for example this previous post). We believe it is not a stretch to apply this contrast between the Yankees approach and the approach of the Giants to the difference between companies that grow by acquisition (similar to the Yankees spending a lot on players whose developmental years were on other programs) and companies that grow organically (similar to the Giants, many of whose stars came up through their own system).
Examples of companies that have grown by acquisition might include serial acquirers General Electric and Oracle, while examples of successful companies that have grown primarily by pursuing their own organic business ideas with few acquisitions include cloud computing star Salesforce.com and even consumer powerhouse Apple.**
In general, we believe investors are generally better served by allocating capital to companies that resemble the Giants (organically grown) than to companies that resemble the Yankees (big-dollar serial acquirers), if for no other reason than the fact that "Giants-type" companies are typically smaller and may be focusing more exclusively on their core competency. A danger with serial acquisitions in the business world is the tendency for a company to end up focusing on too many possible avenues for future growth, rather than the one or two that they have been involved in from the start.
Some readers (particularly if they are Yankees fans) might counter with the argument that the Yankees have long been the winningest team in baseball, perennial contenders for the American League pennant and even the World Series.
We would answer this with the observation that for an investor, by the time a company is big enough to throw around the kind of money that the Yankees do, it may be past its growth phase (there are notable exceptions). We have written about the difference from a portfolio management perspective between trying to build a portfolio of well-run up-and-coming businesses (like the Giants) and trying to build a portfolio of larger, more mature companies in previous posts (see especially the discussion in the second half of this previous post).
These are important issues for investors to consider as they enjoy this year's exciting post-season play in the great American pastime of baseball.
* Full disclosure: Blog authors Dave Mathisen and Gerry Frigon have been long-time fans of the San Francisco Giants and may be somewhat biased in their comparison of the Giants and the Yankees.
** At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Salesforce.com (CRM) and Apple (AAPL). At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by General Electric (GE) or Oracle (ORCL).