Investing is a Game of Failure

When I first arrived in Seattle in 2006, I didn’t follow any US sports. It was all new to me.

I was a big cricket fan back in Australia and the most comparable sport in the US turned out to be baseball.

After 3 years, I adopted the Seattle Mariners as my baseball team in 2009 and have been suffering ever since.

After all these years of watching baseball, I get why Buffett uses baseball analogies. It’s the perfect sport for investors because there are many common traits.

What Do Baseball and Investing Have in Common?

  • Both are based on failure – you have to fail and struggle to learn and to succeed. No investor has a winning percentage of 100%.
  • You have to sit on your butt and do nothing a lot of the time – Baseball isn’t the most exciting sport. There is no crunching of bones or gnashing of teeth. Rarely do people get excited about reading an annual report or looking at financial reports.
  • Patience is a must – Outfielders can go a whole game without even touching the ball but they must be ready with every single pitch thrown. Investing requires patience to let the company and time work itself out.
  • Heavily process-oriented – no matter what the situation, baseball players and investors alike must stick to a process.
  • Mentality is a huge part of the game – Bad decisions, striking out with a chance to win the game and losing money in a stock is guaranteed. The difficult part is to learn from the mistakes but not let it overwhelm and affect your mentality.

Investing is a Game of Failure

In baseball, achieving a 0.300 batting average is considered elite. Flip it over and it also means that even the best players fail 70% of the time at the plate. The success rate of hitting the ball is just 30%.

Ted William’s Circle of Competence

Ted Williams has one of the highest career batting average at 0.344 and he is a legend.

What made him so successful?

It came down to the following:

  1. Seeking advice from all batters and pitchers
  2. Analyzed everything about his process and let the process dictate the outcome
  3. Placed heavy emphasis on patience and understanding behavior

The image above shows Williams’ batting zone. By understanding his zone, or circle of competence, he swung only at the balls that he knew had the greatest chance of success.

Investments will fail. You’ll lose money.

The key is to take the positives and get better. Not to let failure overwhelm and cripple you.

If Ted Williams was an investor, I’m sure he would do the following.

  1. Seek advice and counsel of better investors – read case studies, letters to investors, watch interviews.
  2. Use a systematic approach to select stocks – pick stocks from his circle of competence, build a checklist, keep things simple.
  3. Being patient and being aware of the bias traps lurking around the corner – buy and hold, not buy and forget. Stick to a disciplined selling rule.

Here’s an image that I post regularly from one of Michael Mauboussin’s investment paper.

Investment Process and Outcome
Investment Process and Outcome

With batting, you repeat the swing over and over again, and let the outcome take care of itself.

Sometimes, a well-hit ball will go straight to a fielder.

Good process but a bad break.

Many times, it drops in for a hit or a home run.

Deserved success.

Gaining an Edge

Gain an edge
Ew. A good phrase turned into a bad cliche.

You hear all the time that you need to have an edge in the market. It’s a bad cliche.

But while I promote the OSV Stock Analyzer as a way to gain an edge in fundamental analysis and investment productivity, the easiest, cheapest and quickest way to gain an edge is to simply improve your understanding of behavioral finance.

The problem I have encountered is that I try too hard and make lousy investment decisions. I’m not the only one. There are many investors just like me.

On the other hand, I’ve talked to people who call themselves novices.

Strangely, their portfolio return doesn’t label them in such a way. Their performance returns rock. These investors just stick to a very simple strategy of swinging when their hotspot lights up.

One thing in common is that they are calm and collected. They may not be the sharpest analyst, but they understand what works for them and use it to their advantage.

I call that an edge.

What You Can Do to Win this Game of Failure

Baseball and Dollars | Credit: Getty Images

Read Buffett’s Shareholder Letters compiled in a neat Kindle format. I can’t get enough of it. It’s just $2.99.

Keep up with what Seth Klarman is doing and saying.

Read Howard Marks’ letters.

Mark Sellers gave a great speech on what it takes to be a great investor.

Pick Winning Stocks and Fatten Your Portfolio