Buffett, Investing & Baseball
What do all these things have in common? Buffett and investing definitely go together, but how does baseball fit in? Buffett, a fan of baseball, regularly uses baseball analogies to compare his investment methods. In the investment world, where Mr Market is the pitcher, Buffett is one of the best batters in the world. As always, Buffett is kind enough to share his techniques and strategy to all those that listen. Marks of a truly great sportsman.
Player, Manager, Coach, Spectator
To a lot of people, especially to those starting out, investing is considered daunting, time intensive and difficult. True. Not everyone is capable of saying they were born with natural investing talent, and not everyone is capable of saying they were born to play baseball. Some are better at managing and some are better at coaching.
First you have to figure out what type of player you are. If you get giddy with losing even a couple of dollars, constantly fret over the market fluctuations or just blindly follow the herd, investing in index funds will do you more good. However, I think most of the people reading this would be players.
Sluggers are great fun to watch. They bring in crowds, create noise in the stadium and they carry aura and a sense of expectation. When Barry Bonds steps to the plate or better yet Babe Ruth, people are expecting something. They are on the edges of their seats, eager to see the stitching, leather and core of the ball explode out of the park. These people are willing to pay a premium to see the action closer so that they can witness some exciting action. Now sluggers are huge crowd pleasers, but I believe they fail to create that return to the spectators more often than they do.
It seems to be the same with investors. Ever heard the phrase “I just need to find the next Microsoft or Google”? I too was subject to this type of thinking until Buffett kindly intervened.A majority of people look for and chase opportunities just because they think it has potential. All pitches have the potential to be a homer, but actually getting a homer off it is a different story. They get wrapped up in the emotion of being left behind and chase after opportunities even though the timing is completely off. They only see the glory at the end. What they end up doing is chasing the fast growth stocks even if the price is at a ridiculously high speculative level. Swinging hard at a curve ball aimed right at the corner of the strike zone wont bring many big returns.
Home Run Hero
I define slugger and home run hitters a bit differently. Sluggers will mostly swing at anything. Home run hitters wait patiently for the perfect fat pitch to swing at. To me Buffett is a Home Run Hero. Much like Babe Ruth.
Buffett told CNBC
“What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel and you don’t have to swing. No umpire is going to call you out. You can wait for the pitch you want.”
This quote reflects the style of Ted Williams, whom Buffett refers to quite frequently. The reason behind Williams success is that he had the discipline and patience to wait for the pitches that were exactly in his hitting zone. Williams divided his strike zone into 77 cells and swung at only the pitches that flew through his best hitting cells.
Buffett himself only waits for the “straight fat pitch”, and when he gets it, he bets big. Wall Street thinks otherwise. Their philosophy of diversifying, not betting too much on a single investment, is embedded in the minds of most investors. Buffett on the other hand bets big on the bets where he knows the odds are in his favour. If you bet 10 times at a casino table where the odds are 10-1 for you, obviously you will bet huge each time. The final result will have you as the winner at the end. You may lose once or twice due to bad luck, but overall you win handsomely and with little risk. This seems to be a concept people find hard to comprehend.
To be a great investor, one has to have conviction in his decision. Buffett has that characteristic and was able to bet 40% of his capital in his purchase of AMEX during the whole salad dressing debacle. However, a lot of people think that is risky and gambling. That is understandable. What Buffett does takes a lot of guts.
In the words of Charlie Munger
“I didn’t become a billionaire by chasing after mediocre opportunities.”
But many investors don’t like to wait years on end just for that perfect pitch to come in. Many people succeed in the market by constantly hitting singles. By this, I don’t mean trading every day and gambling in order to achieve a few % points each day and then selling. What I mean by single hitting is going after the sure opportunities more frequently.
Buffett may only swing when the ball comes in his perfect home run cell, but there are many other cells where a single or double can be taken without any risk. Accumulating these singles wins the game. In the game of baseball, constant singles win the game, the division championship and the world series. A disciplined team seeks to maximise its singles. It is the singles which turn into runs and portfolio winners.
Taking singles also requires strict discipline. Take Ichiro as an example. His swing barely changes. He swings at balls he knows he can hit, all the while maintaining focus and discipline. As an investor, we must always work within our circle of competence and do it the right way over and over again. We don’t want our emotions or minds to become clouded.
Charlie Munger mentions that investors should be more like pilots; always checking their checklist prior to taking off.
Whether you are a home run hitter or single hitter, discipline is required in order to succeed. As long as you maintain discipline, go after the sure hits and don’t do a lot of things wrong, you will ultimately end up as an All-Star elite.