The Inside Baseball Approach To Investing And Why It Works
Last week was Opening Day, so it is only natural that we talk a little inside baseball.
There is a lot for investors to learn from baseball. The biggest lessons come from the greatest hitter of all time…
As a Baltimore fan, I have a love-hate—as in I love to hate them—relationship with the Boston Red Sox, but facts are facts. No one has ever hit as consistently as Ted Williams.
At the core of the book is Williams’ philosophy of controlling the “quintessential strike zone” and only swinging at pitches within this ideal area. This allows hitters to drive the ball with authority. He divided the strike zone into 77 baseball-size zones and determined which led to the highest probability of a base hit.
Investors have an advantage over Williams. We do not have to swing. There are no called strikes. There are no walks. We can wait to swing until we see a fat pitch in the zone that gives us the greatest chance of success.
As Warren Buffett said in an HBO documentary not too long ago, “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. If people are yelling, ‘Swing, you bum!’ ignore them.”
I am constantly amazed by the number of people who feel like they must swing at every pitch every day. No ball player ever made it into the Hall of Fame with that approach, and no investor even got rich overtrading their account.
Of course, pitchers and brokers do pretty well as a result of the perceived need to be doing something all the time.
What is your zone? What makes sense to you? What do you know works? What approach fits your personality like a glove and makes money at a fast enough rate to make your financial goals a reality?
Again, we can play a little inside baseball to gain an advantage.
In the story of Moneyball, Oakland A’s manager, Billy Beane, builds a team by using math to eliminate all opinions and biases in player selection.
It turns out that a team full of players who get on base frequently and pitchers who do not walk many batters will win many games. If you pay low prices for these players, your team will win a lot of games and be ridiculously profitable.
Eventually, players become expensive, and you sell some and get more low-priced ones with the attributes of successful ball players.
Moneyball, a baseball strategy focused on using statistics to find undervalued players, took sabremetrics out of fantasy leagues and put it into the Major leagues. There was nothing overly fancy about Moneyball—it does not need fancy formulas or stories.
The team did not always have the best-looking bunch of ballplayers on the field, but they got on base and avoided the type of mistakes that cost them games. The strategy helps find the players the scouts and the media overlooked and used them to win a lot of games.
To win the game of investing, find the companies that get on base a lot.
These are companies with good credit that have the financial strength to survive no matter what the economy, markets, and politicians can throw at them. In baseball terms, they are unlikely to strike out.
You want companies with strong management and excellent fundamentals. The business should have characteristics that allow it to grow at a high rate or attract a buyer at a premium price.
Now comes the hard part.
You wait for that fat pitch. You want the shares of these companies to be in your wheelhouse, where you have the greatest chance of success. You want to pay the lowest possible price for the highest success probability. You have the luxury of not being forced to swing until you have the business you like at the price you love.
Nobody wins every game, but if you use the inside baseball approach to investing, you will win more than you lose and achieve the goals you need to realize your version of financial success.
This post originally appeared at Investors Alley.
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