It is said that to succeed in investing, one only needs to make the right investment calls more than half the time (>50%). Fortunately or unfortunately, this can be a very misleading statement.
The idea behind it is a simple one. The number of times that you are right divided by the total number of investments that you make is called the battling average. The term battling average is rooted in baseball and refers to the total number of hits divided by the total number of At Bats. With a battling average of more than 50%, you can simplistically expect to make positive returns in the long run. However, this may not necessarily be the case…
The reason is that you make lose more on your losers than you make on your winners. This is what the slugging percentage accounts for. Slugging percentage is also rooted in baseball; not every hit in baseball earns the same number of points, and the slugging percentage takes care of that. Similarly in investments, you may have negative slugging percentage despite having a >50% battling average in your portfolio. Do not be too happy just because you see more greens than reds.
Bonhoeffer Fund's performance update for the month ended July 31, 2022. Q2 2022 hedge fund letters, conferences and more The Bonhoeffer Fund returned 3.5% net of fees in July, for a year-to-date return of -15.8%. Bonhoeffer Fund, LP, is a value-oriented private investment partnership for . . . SORRY! This content is exclusively for Read More
Which is more important?
I am inclined to believe that the slugging percentage is more important as it considers factors such as risk management and position sizing (which demonstrates conviction). However, the time of investment strategy that one employs also affects the relative importance. For example, in a diversified portfolio of net-nets where every stock has an almost equal risk-reward, it is the battling average that will most likely determine whether you make positive returns overall. On the other hand, someone with a venture capital style portfolio only needs 1 out of maybe 100 investments to be a winner in order to make positive returns.
It is important to know what matters for your investment style and portfolio. Otherwise, one may just be focusing on the wrong details. For example, it has been said that George Soros only has a battling average of about 30%. And I’m pretty sure he is not bothered by that one bit.