Fat pitches don’t come often. Life is a cunning pitcher. So good hitters don’t swing at everything. They pass on dozens of balls, take walks, and just wait for that one perfect pitch.

The point is to be selective. Every pitch that comes your way looks tempting. But just as you swing at one, it curves and the best you can do is hit a lazy and easily caught fly ball. Wasted effort.

Entrepreneurs can be good hitters or bad hitters. The good ones pass on opportunities all the time. They only swing on HUGE opportunities.

The same can be said for investors. Warren Buffett is famous for his patience. He waits and waits until a great company gets really cheap. Everyone else has bailed on it because they’re focused on the short term results. Warren sees the fat pitch that is a great company on sale, and swings hard for a home run by investing large amounts of money. This approach means he doesn’t need to diversify. Diversification is like swinging at a bunch of pitches.

This baseball season, you’ll see my beloved Boston Red Sox play competitively and probably make the playoffs. Much of that will be because they have a lineup full of patient hitters that just wait and wait for the fat pitch.

Funny how selectivity applies to so much in life.

Are you judging your personal, professional, and organizational results on a superficial basis? Do you just ask, “Did it work?” When the results are great, people celebrate. When the results don’t meet expectations, people panic or start pointing fingers. I think that’s the typical response. Very much like the New York Yankees under the reign of King George Steinbrenner. It’s the reason why turnover was so horribly high, Brian Cashman and Joe Torre being the exceptions.

Process over results. You should be asking, “Regardless of the results, did we go through the right process?” Design the right process and you can confidently stick to it. The results will still be highly uncertain but you won’t blame yourself for random effects outside your control. You’ll also be able to stay faithful to a good process despite less than stellar results.

Rumors abound that my beloved Boston Red Sox plan to bid vigorously for the services of free agent Mark Teixeira and Japanese pitching phenom Junichi Tazawa. Although I’d like to see the team take the challenge of developing and sustaining a winning team in a major market with a Moneyball philosophy, I’m actually excited by the possibilities of these two signings. I’d rather see the team stay competitive while reducing its overall payroll, but if we’re going to spend money in the free agent market, then we should spend the money to buy premium talent or extremely undervalued and obscure talent. I don’t want to pay fair value for middle tier talent.

I don’t think that John Henry and Theo Epstein really need to find a way to replace Manny Ramirez’s bat, Jason Bay may not crush like Manny, but he is almost as valuable if you factor in statistical and defensive considerations. If instead of cutting payroll, the team is thinking about increasing payroll, then it might as well go for arguably the best hitter available on the market and pay a premium for his services. Mark Teixeira could conceivably break the franchise pay record set by Manny Ramirez. Teixeira is a powerful switch hitter, something we haven’t had in our offensive arsenal for quite a while. Jason Varitek is a switch hitter but few will argue that he’s a masher. Teixeira is entering the prime of his career cycle and should be a safe bet to break even on his salary on a performance basis.

Junichi Tazawa, a 22 year old pitching sensation from Japan, is an interesting validation of the efforts Henry and Epstein have invested into Japan. When they signed Daisuke Matsuzaka and paid a big premium, they established Boston as a desirable destination for talented Japanese players who wanted to test their skills in the much more competitive and lucrative United States market. The sophisticated public relations and marketing campaigns the Boston management team put in action generated tremendous amounts of goodwill in Japan. That has culminated in Tazawa announcing that the Red Sox is his preferred choice despite more lucrative guaranteed contracts offered by the Atlanta Braves, Texas Rangers, and Seattle Mariners.

Both these players will improve the team, but will come with high price tags. Given the paucity of truly top tier free agent talent, now may be the year to buy rather than build from within.

In Theo I trust. In the quest for perfection, Theo Epstein has the opportunity to get much more capital efficient. While everyone else worries about what the Yankees are going to do in the offseason and how much money they are going to spend, I want Theo to focus on capital efficiency and roster efficiency. The team has the ability to improve not by addition but by subtraction. Do not sign any high-ticket free agents. The youth movement consisting of Pedroia, Ellsbury, Lowrie, Lester, Masterson, Delcarmen, Papelbon, Youkilis, and Buchholz keeps the machine lean and mean at a relatively low cost. Please do not bring the following fellows back – a few responsible for some of the fondest championship memories of the last few years. Sentimental attachment seldom leads to good decision making.

Jason Varitek – The Captain’s armor is getting heavy. It doesn’t weigh any more than it used to. If anything, it weighs less as space age materials are being used in all manner of sports equipment. The Captain is simply suffering from the ailment all major league catchers fall victim to – accelerated aging. The bat is heavier. The chest protector is heavier. His near automatic out in the bottom of the lineup is the heaviest burden of all. He was a great player for the few peak years he spent in a Red Sox uniform but it is time to say goodbye to the Captain. While we are at it, let’s not try to find a replacement captain – it’s an emotional and outdated convention that has little impact on the overall performance of a team. If the Yankees want to keep the foolishness alive, let them keep Jeter as their glorious captain. Players simply understand that someone will usually step up to become a leader – there need not be a public declaration of who this person is. It’s obvious to all without having to designate someone and have him wear a special patch on the uniform. Please don’t hype Pedroia as the next captain.

Designating a captain also makes getting rid off him exponentially harder and a lot more political. Inevitably, teams end up keeping a player around longer than he is useful because of the emotional attachment the organization and fans have built up through the years. Derek Jeter will probably wear a Yankees uniform well into his ineffective late thirties and maybe even his early forties. Every stinking Yankees fan will secretly want to be rid of the captain but they’ll be unable to imagine life without the great leader. Nonsense.

Curt Schilling – He will always be remembered for bleeding his way to victory on the mound. There have been few more heroic moments in all of sports. Such is the special position of a great pitcher – he can carry the whole team on his shoulders with a superhuman pitching effort. Schilling’s salary has weighed on the payroll all year long without him pitching one measly inning. He will likely retire and his expiring contract affords the team some significant dollar savings. Does anyone doubt that he will go down in history as one of the greatest Red Sox ever? That he did more, in his shortened and injury-filled Boston career, for the team than Pedro Martinez ever did? He is the hero but all heroes must die or at least walk off into the sunset to never fight again.

Mike Timlin – In the pantheon of heroes stands a blue collar workhorse named Mike Timlin. He pitched and pitched and pitched until he couldn’t pitch anymore. Few pitchers have appeared in as many games as the prolific Mike Timlin. Longevity itself is a great accomplishment in the world of professional sports. The daily physical grind and emotional stresses are efficient agents of destruction. Few men survive to fight as long as Mike Timlin and Cal Ripken. But in the quest to break records for pitching appearances or games played, the team put a cute personal achievement above the purer goal of winning. For the last two years, we’ve endured watching this once reliable warrior get fed to the lions. He blew leads in dramatic fashion and lost games in gut-wrenching displays of futility. How does one say goodbye to a loyal company man? It calls to mind the indignity of a cheap gold watch for the corporate retiree.

Julio Lugo – Here is one player I won’t miss and would like to forget quickly. Julio Lugo’s contract is not over yet but we need to get rid of him somehow. We’ll likely have to pay someone to take him off our hands. This isn’t so much a case of capital efficiency as it is a case of roster efficiency. He’s a terrible defender and an even worse hitter. His amazing ability to make outs is only surpassed in absurdity by the dearness of his salary. Theo Epstein has made few mistakes since taking over as the general manager but this one is probably the worst. You can’t win them all even if you have won two championships in the last handful of years. Even Warren Buffett isn’t perfect. Theo Epstein has been a great value investor in baseball talent on balance. Lugo represents one of the few investments he made in a dubious growth prospect at its peak price. Lowrie cannot do much worse at a much lower cost.

The next season is full of possibility. The young players will only get better and the Red Sox have the potential to get younger, better, and cheaper at the same time. In the meantime, I’ll be lamenting an enjoyable yet depressing defeat.

It’s been a busy year and I haven’t been able to catch as many Red Sox games as I would have liked. Granted, the urgency has been diminished by two championships in the last four years after a near century of long-suffering from close calls and dramatic second-place denouements. The championship in 2004, which broke the slump, was highly cathartic and wonderfully expressed by this surprisingly sympathetic and understanding Nike (NKE) commercial. I cry every time I watch it. Since that 2004 campaign, I’ve watched the franchise grow in sophistication. The team’s use of sabermetrics and shrewd market operations has made it the closest thing to a dynasty in Major League Baseball.

This year, my precious Boston Red Sox are once again in the playoffs and are on the verge of eliminating the Los Angeles Angels from the first round. Jon Lester, the young pitcher and cancer survivor, spun a marvelous Game 1 against the Angels and looks like he will become another ace for my boys from Beantown. His pursuit of excellence in the face of great challenge serves as motive inspiration. J.D. Drew, the marvelously talented but oft-injured outfielder, hit a late tie-breaking home run in Game 2 for the victory. Odds are, the Red Sox will win this series as few have ever come back from a two game deficit in a five game set.

The Red Sox enter the playoffs as this year’s Wild Card in the American League and many unsophisticated “gurus” or analysts would have you believe they are no longer the best team in baseball. Disney’s (DIS) ESPN staff of “experts” has put together a Power Rankings list that has the Red Sox ranked as the fourth-best team. They couldn’t be more wrong. I’m going to argue that the Red Sox are indeed the best team in baseball.

Sure, they did not finish with the best record, but wins and losses are only one way to look at dominance. I’m looking for an approach that reveals more truth by looking at the numbers behind the numbers. Much like the superiority of On Base Percentage + Slugging Percentage (OPS) as a tool for analysis over the simplistic Batting Average, which was nicely documented by the oft-cited Moneyball by Michael Lewis. Winning Percentage, and more accurately, winning percentage in the playoffs, is the only thing that counts in the end, but I think we can gain a deeper appreciation for a team’s record by looking at more nuanced numbers. At the same time, I’ll try to keep in mind jazz musician and civil rights activist Charles Mingus’ timeless insight; “Anyone can make the simple complicated. Creativity is making the complicated simple.”

Another way to look at dominance is to examine the Run Differential each team achieves. Run Differential is simply the total offense (runs scored) minus the total defense (runs allowed) over the course of a 162 game season. It stands to reason that a team that score more runs than it allows to opponents, over the course of a whole season, is a winning team. The degree to which it can score runs and limit opponents’ run-scoring should determine its level of success. The greater the Run Differential, the better the team and the more dominant its victories. A seasonal Run Differential is a measurement of a team’s sustained ability to win or dominate. The table below shows the records of the eight playoff teams.

By Run Differential then, the Red Sox should only be the second best team in baseball. ESPN has a standings report that shows the Chicago Cubs finishing the regular season with the best run differential. The lovable losers from the Windy City scored 184 runs more than they surrendered. The Red Sox only managed to score 151 more runs than their opponents. The Philadelphia Phillies rank third with a run differential of 119 runs. The emerging Tampa Bay Rays have 103 runs more than their foes. Interestingly, the team with the best record in the regular season, the Angels, only managed to score 68 runs more than they gave up.

We can’t stop at Run Differential. What if the American League is the league with better teams and thus tougher competition? What if the National League contains better talent? We need to look at what I am inclined to call Relative Dominance, Adjusted Run Differential, or something to similar effect. With the unbalanced schedule, teams play opponents from their own division more frequently. So an examination of the competition within each division could give us clues as to who is relatively more dominant. For example, the Red Sox and Rays both play in the same division and face each other more frequently. They had to assemble good records while engaged in this battle of behemoths. Perhaps the Angels achieved their best record by playing against relatively weak division rivals out West.

The idea is to award teams that assembled winning records against tough divisional competition and to penalize teams that achieved winning records against futile divisional competition. What if we simply tallied up a division’s cumulative Run Differential and added it to the playoff team’s Run Differential. In the American League East for example, we take all the teams in the division and add up their cumulative Run Differentials and get a +333 value. Then we add in the Tampa Bay Rays’ Run Differential of +103 to get a +436 value. When we do the same process for the Los Angeles Dodgers, we end up with a -203 value! The Dodgers beat up on a bunch of sissies. Below is a table of this analysis.

It is interesting to see that the team with the best record entering the playoffs, the Los Angeles Angels, and the team with the weakest record to make the playoffs, the Los Angeles Dodgers, both have a negative value for Relative Dominance. They both beat up on hapless division rivals. But Relative Dominance tells us, surprisingly, that the Angels are a lot weaker than their record suggests, given they achieved the best Winning Percentage in the American League.

The Red Sox, despite entering the playoffs as the Wild Card, is the strongest team when measured by Relative Dominance. They scored the biggest Run Differential in the toughest division, a division that included the wildly successful Tampa Bay Rays, the hated New York Yankees, and the tough luck Toronto Blue Jays. Only the Baltimore Orioles had a losing record and negative Run Differential.

I acknowledge that this is only one way to look at a team’s record.  I’m sure there are more robust methods out there like Bill James’ Pythagorean Theorem.  Are there other methods that could better describe a team’s winning record?

Of course, we still have to play the games on the field. Many say that baseball is unpredictable. I say baseball is mostly predictable but there are occasional surprises. The Chicago Cubs, the team with the strongest Run Differential during the regular season, were just eliminated by the Los Angeles Dodgers. This was a huge surprise and an Herculean feat pulled off by the Dodgers.

The Red Sox and Tampa Bay Rays are on the verge of advancing to the next round. Their matchup in the American League Championship Series will be the real World Series as they are the two strongest teams on paper. As a member of Red Sox Nation, I’m most nervous going into this next round with the Rays. The Rays are younger and hungrier – you can never discount that in life. Whoever wins the American League pennant will be the favorite to beat the National League champion. We shall see.

If the Red Sox win it all again for the third time this century, general manager Theo Epstein and owner John Henry will truly have built a dynasty. This post-catharsis dominance has been an enjoyable departure from a long bout of depressing close calls.

Manny Ramirez, usually a slow starter, drove in four ribbies. Ramirez is jockeying for a contract extension so I expect him to get off to an uncustomary strong start. I would prefer the Red Sox arrange rich and incentive laden, perpetually renewable one-year extensions similar to the arrangement they have with knuckleballer Tim Wakefield.

The youth movement continued to impress. Dustin Pedroia had a couple of hits and scored a run. Kevin Youkilis walked as usual and also scored a run. Rookie Brandon Moss blasted a homer off Oakland closer Huston Street. The emerging marketing phenomenon Jacoby Ellsbury made a fantastic leaping catch in centerfield. Young closer Jonathan Papelbon also struggled in a save situation but ultimately prevailed.

Surprisingly young Daisuke Matsuzaka will never be the huge star he’s projected to be if he cannot locate his pitches. He got off to an ugly start with wild pitches and surrendering a homer. Give the guy some credit, he persevered and regained his composure. He ultimately left the game with a chance to be the winning pitcher of record.

I’m going to be waking up at 4am again to catch the second game of the series. Another cog in the youth movement machine, rookie Jon Lester, will be pitching for the Red Sox tomorrow. Life is good, baseball is back.

Early tomorrow morning, I’m changing my routine so I can catch the Red Sox open the season against the Oakland Athletics in Japan. ESPN (DIS) will be televising the game at 6am EST, but since I’m in the Mountain states, I will need to get up by 4am MST to catch the first pitch. Can’t complain though since I’ve been in withdrawal since the last out of the World Series in 2007.

The Red Sox better jump out to an insurmountable lead early so I can comfortably get back to preparing for the markets. I am a moderate to long term investor so I usually don’t make very many moves, but it is essential that I stay aware of big picture developments and microeconomic situations. During market hours though, I don’t pay too much attention to the action because I have to manage my technology startups and because I find that not being glued to the screen helps me to keep aloof of the market’s passions. After market close though, I spend a great deal of time doing the deep research that helps me attain an edge.

If the boys from Beantown don’t take an early lead, I’m going to have to say to heck with the market and keep my eyes affixed to the action on the baseball diamond.

Since the Red Sox won a bidding war for the services of Japanese pitcher Daisuke Matsuzaka last year, the fan base in Japan has grown exponentially. This is a strategy an increasingly sophisticated Boston team should expand upon. By scouring the world for the best baseball talent from relatively unknown countries, the team can diversify its fan base and talent base. Brand – build it and they will come. This is a concept that the management of the team should instinctively understand. John Henry, the owner, made his fortune in commodities investments; so I am sure that he can see the parallels between building a great team and a great portfolio.

Go Red Sox!

Jonathan Papelbon, the closer for the Boston Red Sox pitching staff is pulling the “I’ve got to do what’s best for my family so I’m asking for a humongous raise” routine. Admittedly, he is one of the best young arms in baseball regardless of pitching role. He is also a unique talent in the world of dance. He joined the Red Sox a couple of years ago and, through unforeseen circumstances, found himself entrenched in the closer’s role. He has since become one of the best closers in the game. Now he has his eyes set on an exorbitant contract similar to Mariano Rivera’s of the New York Yankees, which would make him one of the richest players in the game.

But using Mariano Rivera as a comparable is insane because expensive long-term contracts for closers just don’t make sense. The Yankees and other less rational teams have awarded outlandish contracts to closers for dubious reasons. Their impact on the game is primarily emotional. It is much harder emotionally to lose a lead and be defeated in the ninth inning than to lose a lead, say, in the fifth inning and be defeated. But the outcome is the same in both scenarios, defeat. This emotional aversion to last-minute losses assigns a large premium to “closers” that far outweigh their intrinsic value to the team. A good inning pitched is a good inning pitched is a good inning pitched.

If there is a mistake the Theo Epstein regime has made, it is allowing Papelbon to become indispensable as the closer. Papelbon’s arm is young and trained for the rigors of starting pitching. If he played the role of a starter and contributed a disproportionate share of excellent innings pitched, he would be worth the money he is asking for.

Last week you may have encountered some colorful uses of the lexicon from Sam Zell that we are not used to hearing at the Times…But of course we still have the same expectations at the Times of what is correct in the workplace. It’s not good judgment to use profane or hostile language and we can’t tolerate that…In short, nothing changes; the fundamental rules of decorum and decency apply…Sam is a force of a nature; the rest of us are bound by the normal conventions of society.

He recently appeared on CNBC to talk about the economy, the housing market in particular, and his plans for his recent investments in newspapers and the Chicago Cubs. Watching the guy speak, you can’t help but be impressed by his dry humor, his uniquely cantankerous tone, and the unmistakable impression that he has had a fire in his belly for a long time. Here are some interesting tidbits (paraphrased):

• On selling the Chicago Cubs: “We own the Cubs and we intend to sell on our time frame and manner in which we choose, many others have opinions on how we should do this, but I don’t care. Excuse me for being sarcastic, but the idea that others are debating about what I should do with my assets leaves me questioning the integrity of that debate. There are a lot of people who want to buy the Cubs, and they would like to buy under their terms and conditions. Unfortunately, they have to deal with me.”

• On politics: “We have two Democratic candidates who are vying with each other to describe the economic situation worse. The reality is that if you live on Wall Street and you’re in the credit markets the world couldn’t be worse. If you’re a farmer and you’re getting $25 for your wheat, you’re having a great time. If you’re a CEO and you’ve got a balance sheet that’s bullet-proof, you’re in a great position. This whole thing is way out of control, way out of hand.”
  • I tend not to get involved in political campaigns.
  • “Logic can overcome Liberalism.”

• On investing: This is where I get the most value out of listening to this guy.
  • “We have been professional opportunists, when there is dislocation, that usually creates opportunity.”
  • “I never call or time markets – I only try to respond to what I think is logic.”
  • “My decision to sell Equity Office was not based on crowds, was not based on euphoria. Someone made me an offer I couldn’t understand and I thought it was a Godfather offer.” Another classic line.

• Two old dogs: Jack Welch, former CEO of General Electric (GE) was on the show and got to ask Zell a couple questions. It was a little heartwarming to see two great businessmen sharing a little camaraderie. You just know these guys are tough bosses to work for, but they keep it honest and straight.
  • Jack Welch: Sam, you’re the master of timing.
  • Jack Welch: These guys (CNBC crew) accuse me of being a cheerleader, but they wouldn’t dare say that to you.
  • Jack Welch: Sam, can we play what you’re saying every half hour (because it’s so positive)?
  • Sam Zell: You guys are opining every half hour so what do you need me for?
  • Jack Welch: Sam, thank you so much.
  • Sam Zell: Good to see you again Jack.

Watch the video here:

The accompanying video features John Farrell, the Sox’s pitching coach talking about Josh Beckett’s dominance in the 2007 playoffs and what Beckett has in store.