“Baseball is the only field of endeavor where a man can succeed three times out of ten and be considered a good performer.”
My favorite sport in the whole world is baseball. I love everything about it. The history, strategy, pace of play, intricacies, stats, and the grace of the game.
It can be breathtaking and heart breaking, sometimes in the same play. There is nothing like watching a playoff game with the game on the line and both team's best pitcher and hitter competing against each other.
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To stand in the batters box and face a man that can throw over a 100 mph takes courage and an incredible amount of skill. This is not a skill that everyone has, to hit a round ball with a round bat and to do it successfully.
Michael Jordan was considered the finest athlete of my generation and he couldn’t hit a baseball. It is considered by some to be the hardest act there is in sports.
Consider this, to be a successful hitter in baseball means that you only succeed three out of ten times. In any other profession you would be fired so fast with a performance like that. Imagine a computer repairman only fixing three out of ten computers.
Out of business.
Ted Williams, is considered arguably the greatest hitter in the history of the game. He played from 1939 to 1960 with the Boston Red Sox. His career average of .344 and 521 are some of the best in the history of the game. At the age of 39 he hit .388 which won him the league batting title that year. Which made him the oldest player to ever win a batting title.
In his final at bat of his career he hit a homerun. Very fitting for a player of his caliber.
Simply put, the man could hit.
So what does this have to do with investing? Well, let’s take a look.
Ted Williams and the Science of Hitting
After his playing day Williams still was a major influence on the baseball world. He did manager for a short time and did some consulting for the Red Sox.
But his greatest contribution was his study of hitting. During his career he was a great student of hitting and was always reviewing what the pitchers were doing and using this information to analyze his approach to become better.
He said that most players during his time didn’t pay much attention to what the pitchers were throwing and how they did against those pitches. Bobby Doerr, who was a career .280 hitter would often come back to bench without any idea what pitch was thrown, even if he hit a homerun.
In his seminal book “The Science of Hitting” he described his discipline with his approach of creating 77 cells in the strike zone, each the size of baseball. Swinging only at balls in his best zone would allow him to hit .400. Reaching for balls in his worst zones, for example the low and outside corner zone of the strike zone would reduce him to a .230 hitter.
He found that if he waited for his pitch in a zone that he could handle then he was going to be very successful and if he swung indiscriminately at any pitch in any zone he was likely to very unsuccessful.
I would say that his philosophy worked out for him pretty well. He combined power, patience and skill into a combination that has not been seen since his time in the league.
How Ted Williams approach can be used in investing
Warren Buffett is a huge baseball fan. It was rumored recently that he was interested in ownership of the Chicago Cubs. He uses baseball metaphors to describe some of his thoughts on the approaches he uses in investing.
In particular he was a huge fan of Ted Williams, with good reason. Years ago he picked up a copy of “The Science of Hitting” to see what he could glean from it to help his investing.
Some quotes to help illustrate our point.
“Ted Williams described in his book The Science of Hitting, that the most important thing--for a hitter--is to wait for the right pitch. And that’s exactly the philosophy I have about investing -- wait for the right pitch, and wait for the right deal. And it will come….it's the key to investing.”
This goes to his being willing to wait for the right company in the right situation to present itself to him. He is willing to wait until that time presents itself before pulling the trigger and not before.
Patience is one of the hardest investing traits to master, but it is essential to the value investing strategy.
Think of it this way, we all come across great companies that we would love to own because they offer great products or services. But they are incredibly expensive or the valuations are just too high.
When you have this choice you have two ways to go. One, buy it regardless of the price. Two, wait until the price reaches a point that it is much more attractive to you.
Choice number two is going to yield much better results for you in the long run. This is where having a margin of safety built into your investments is going to bring great rewards because you waited for that pitch in the zone you could do some damage with.
Even though Williams was one of the most feared hitters in his time he was willing to wait for his pitch. His discipline was incredible, he wouldn’t swing at a pitch unless it was in one of his zones. He lead the league in walks many times as was willing to wait, even if that meant some games he would only get to swing the bat a few times.
Warren Buffett’s discipline is also legendary in that regard. He will wait for his pitch and once he finds he will go all in. Look at Coke, American Express, Geico, and many others. They all show that he has the patience to wait for the pitch.
“The stock market is a no-called-strike game. You don’t have to swing at everything - you can wait for your pitch.”
This is one of the great things about the stock market and investing is that you don’t have to swing at every company you come across, stock tip you hear at a dinner party, or great startup you read about.
You can let a thousand ideas cross in front of you before you take your first swing.
There are no three strikes and you’re out here.
Again patience to wait for your pitch is your friend.
Let’s not kid ourselves. This is not an easy thing to do. We all get excited about a investment opportunity and want to take the plunge to buy that company but if it is not the right opportunity then we are doing ourselves more harm than good.
Another Warren Buffett quote for you.
“In investments, there is no such thing as a called strike. You can stand there at the plate and the pitcher can throw the ball right down the middle, and if it's General Motors for 47, you let it go right on by and no one is going to call a strike. The only way you can have a strike is to swing and miss.”
Just remember that the Wall Street machine will keep trying to throw you pitches, the financial media and your friend down the street will try as well. But if these pitches aren’t in your zone and are rather a low and away fastball that you can’t hit, then don’t swing. This will lead to underperformance.
How to find a good pitch to hit?
How do we find the right pitch to hit?
This comes down to being prepared. Doing your homework and knowing your circle of competence.
Working within areas that you can easily understand and explain to others will lead to much better success when investing.
Reading is key. It works for Warren and Charlie Munger. Seth Klarman, Joel Greenblatt, and Monish Pabrai too. This means screening for companies and reading through the financials so that you fully understand the company and how they make money.
This means studying the industries that this company plays in. It also means looking at the macro and micro economics so you have an understanding of the current playing field.
Without this understanding of the fundamentals, any pitch you see is going to be outside your hitting zone. This is imperative to your success is being prepared. See ball, hit ball doesn’t work in the stock market. You do this and you are guaranteed to strike out.
There is nothing wrong with finding a company that you may be interested in and reading more about it and finding that you just don’t understand it.
Recently I came across a tech company that had great potential but when I started reading the annual report and discovered what the company really did. Frankly, I couldn’t understand it. It was so technical and above my circle of competence in that field that I had to pass. It was frustrating but it was the right thing to do.
I have found if I can’t explain it to my four year old daughter then it goes into the too hard pile and I move on.
So once you are prepared for the right pitch, once it comes your way you can take your swing at it and buy.
It’s a great feeling when our old friend, Mr. Market shows up with a sweet pitch to swing at and we are ready and waiting.
When we do get that pitch to swing at we need to be quick to ball and rational about our decision. Buffett always says that when he finds a ball he can hit, he swings with all his might. So when you do find the right opportunity you need to make the most of that pitch.
How many pitches to swing at?
This is always a difficult question. I recently was listening to an interview with Monish Pabrai, who is one of the great superinvestors of our time.
In the interview he said that he was happy if he discovered two or three good ideas a year to invest in.
That’s it, two or three. Not a lot huh?
Seth Klarman, another superinvestor stated in his seminal book “The Margin of Safety” that waiting for the right pitch was essential to value investing and achieving amazing returns.
““When attractive opportunities are plentiful, value investors are able to sift carefully through all the bargains for the ones they find most attractive. When attractive opportunities are scarce, however, investors must exhibit great self-discipline in order to maintain the integrity of the valuation process and limit the price paid. Above all, investors must always avoid swinging at bad pitches.”
If you can avoid swinging at bad pitches and you find two or three good investments a year then you would have about 20 to 30 ideas over a 10 year period.
How many is enough. Warren Buffett said once that we should look at investing like having a punch card with 20 punches available.
I think that says it pretty well. I have found that having a portfolio of fifteen to twenty companies is enough. You can extend that a little bit but once you get over that number it gets that much harder to keep track.
Studies have shown that once you get above 25 stocks in your portfolio that your performance starts to suffer and can be a drag on performance.
Warren frequently uses a baseball analogy to illustrate the discipline of value investors. We need to think of long-term value investors as a batter in a game with no balls or strikes are called, and where dozens or even thousands of pitches can go by before we even think about swinging.
Investment ideas can come from so many different, unlikely places. You just need to keep your eyes open for those opportunities when they present themselves.
Ted Williams was a great man and a great baseball player. Some say he was the best hitter in the history of the game, if not then certainly of his generation.
His study, preparation and discipline led to the fulfillment of his talent and a great career.
We can learn a lot about ourselves and our investment philosophies from his thoughts on hitting. This is why Warren Buffett was so taken with his thoughts on hitting and how they could translate to his investment strategy.
There are so many great ideas out there that can be applied to our lives and out investing. My hope with this post is that we can always look outside our narrow focus to observe what is out there that can help us in our lives.
This was a really fun post for me to write. I was able to investigate both of my loves, baseball and investing.
I hope that you enjoy reading it as much as I enjoyed writing it.
As always thank you for taking the time to read this, I do appreciate it.
If you have any thoughts on this post and how it has affected you please let me know in the comments.
Dave Ahern is a self-taught value investor. He has a passion for learning and is always looking for a way to better himself. You can find his work at intrinisicvalueformula.com.