There are numerous parallels between sports and investing. Last fall we discussed some of the similarities between football and investing. With baseball season underway, let’s take a look at some of the ways in which investing and baseball are alike.
The average baseball game lasts about three hours. In 2013, The Wall Street Journal (WSJ) did a sampling of three different games in which it found that about 90% of the game is spent standing around. This translates into about 18 minutes of action during an average game. As an aside, WSJ did a similar study on NFL games in 2010 – the average action time was only 11 minutes.
In theory, it does not make a lot of sense for highly trained, world-class athletes to spend so much time standing around. But, it actually serves as a good metaphor for investors. Like baseball, successful investing is rarely a game won by those that are doing something all the time. In fact, frequent trading can work against investors. It can lead to higher transaction costs, increased taxes, and weaker performance. For example, according to research performed by Boston-based consulting firm Dalbar, for the 20 years ended December 31, 2014, the S&P 500 returned an average of 9.85% per year compared with the 5.19% average annual return of stock fund investors. This underperformance is likely attributable to investors buying in after the market starts rising and avoiding the market at its lows. The result is that investors fail to achieve the results that would have come from staying consistently invested through the market’s ups and downs.
In baseball, even the best power hitters strike out much more frequently than they hit home runs. In the current decade, Toronto’s Jose Bautista’s has hit 232 home runs, which is the most of any player. He has hit a home run in a little more than 6% of his plate appearances. However, during this same stretch he has struck out 16.2% of the time. When Bautista comes to bat, a fan might be wondering if he will add another home run to his growing tally. But, that fan is actually more likely to see him strike out. Bautista could hit two homers in a game or five in a week and then not hit one for two weeks.
Fortunately, for Blue Jays’ fans, Bautista has teammates that can also come through when he does not. This points to the parallels between a winning baseball team and a successful investment portfolio. A good team includes a mix of different types of players – sluggers, hitters who reach base frequently, speedsters as well as plodders, and batters who hit lefty, righty or from both sides. It also needs a strong pitching staff and reliable fielders. A few capable bench players are also necessary. Similarly a good investment portfolio is well diversified. It includes domestic and foreign equities ranging in size from small-to-mega cap that participate in different businesses. It also holds domestic and foreign fixed-income investments of different maturities and risk profiles.
Warren Buffett, who has one of the investment industry’s most enviable track records, often uses baseball as a metaphor for the way he invests. Here are a couple of his well-known quotes:
The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch.
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.
Investors often fall victim to the idea that they need to be doing something active with their portfolio on a regular basis. This can frequently work against them. As Buffett notes above, investing, like baseball, is a calm and quiet practice much of the time. There are, however, a few crucial decision-making moments.
We believe an investor’s best chance for success comes from the consistent application of the same investment process in all types of market environments. It is not necessary to swing at every pitch that comes your way either. It is best to be patient and focus on identifying investments that will add long-term value to client portfolios.