Play Ball, Make Money
As the spring training baseball games start in earnest, it might be useful to see what lessons from America's pastime can make us better investors.
There are many similarities between the game of baseball and the serious business of investing. Both consist of long periods of time of relative inactivity, where the focus is on not making mistakes and playing excellent defense.
Both also contain moments of tremendous excitement, when proper execution creates spectacular gains that can lead to wins. And both require intense concentration and study to become successful. Much of the success in both endeavors comes from exploiting the mistakes of others.
There are two quotes from baseball greats that would seem to have critical relevance for long-term investors.
The first comes from Boston Red Sox great Ted Williams -- who is regarded as one of the best, if not the best, hitters to ever play the game. When asked how to become a great hitter, his first piece of advice was: wait for a good pitch. Do not chase pitches out of the strike zone, and wait for the one you can drive for a base hit.
This is fantastic advice for individual investors as well, and has been echoed by Warren Buffett. You do not need to swing at every pitch or trade every day. Wait for that pitch right over the center of the plate, the one you can smack over the fences.
For a value investor, the range of perfect pitches includes good companies bought at ridiculous prices. Buying a company that has strong fundamentals, at prices lower than the tangible book value of the assets owned by the company, is the equivalent of a grooved fastball. If the stock is both safe and cheap you have the potential for an investment home run, and odds are no worse than a solid base hit over time.
Buying stock in a bank with a solid loan portfolio and adequate capital for 80 percent of tangible book value is a perfect pitch. As long as you swing, odds are very high you will end up standing somewhere on the bases and be well on the way to scoring.
Every once in a great while a pitcher will hang a curveball over the plate, and even a mediocre hitter can smack it into the outfield seats. The investing equivalent of that is a great company in a bad market. When you can buy Disney for a third of the appraised asset value, and Coca Cola at a single digit PE ratio as you could in 2009, it is very easy to score big. These opportunities do not come along every day, but it is very profitable to wait for them.
A safe and cheap stock purchased in bad market conditions is the perfect pitch to hit and, until it is presented, most investors should just take and avoid all the junk being thrown at them every day.
Earl Weaver of the Baltimore Orioles was one of the best managers in the history of the game. When asked what it took to be a winner he once said, “The key to winning baseball games is pitching, fundamentals, and three-run homers.” The same is true when comes to investing in the financial markets. The key to winning is to successfully execute the little things during the game -- and to score in bunches when the opportunity presents itself.
Think about the fundamentals of investing. We know that buying stocks below asset value that also have solid of credit scores and fundamental strength in the balance sheet outperform the market over time.
We know that buying stocks like our farmer friend Mr. Womack, when markets are depressed and selling them when conditions are bordering on euphoric, generates consistent profits over our investing life span. We know the playing solid defense and not chasing high multiple momentum stocks can help prevent us from suffering catastrophic permanent losses of capital. Focusing on the fundamentals of deep value investing, as laid out by Ben Graham, Seth Klarman and others, puts you in a position to win far more than you lose.
If you pay attention to the fundamentals of stock selection, and buy safe and cheap stocks, you will have a decent average of wins. No one can tell which one of the stocks will be the equivalent of a three-run homer, but some will -- as the value of the company grows faster than the price of the stock for a sustained period of time and become a multi-bagger.
Patience, discipline and focus are necessary for success in baseball and in markets. Much as Mr. Williams and Mr.Weaver have laid out the path to success on the diamond , great investors like Graham, Womack, Walter Scholes and others have laid out the formula for success in the financial markets. Buy stocks when they are cheap and sell them when they are not.
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