Investing With Earl Weaver

 | Jan 22, 2013 | 3:00 PM EST
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It was a tough weekend: We lost two baseball legends Stan Musial and Earl Weaver. Although I respect and admire Musial, Weaver had the most profound effect on my life. I grew up with his Baltimore Orioles' teams and have adopted many parts of his baseball philosophy to my life and the markets over the years. One maxim in particular is applicable to the markets -- and especially the asset-based value investing approach I favor. Winning, according to Earl, is about good pitching, defense and three-run homers.

This is true in the markets as well. If we take the baseball analogy even further it was Warren Buffett who pointed out that investing is a game where you have unlimited strikes and can wait to swing at only the very best pitches. We can choose to miss all the new paradigms, technological breakthroughs and one hit wonder consumer stocks at nosebleed multiples. No one is going got make us close out our accounts if we pass on three consecutive overpriced IPOs. You don't lose your investing privileges for not chasing your broker's idea of the day. You can wait for the pitch you like, and then, and only then, start sawing away.

Playing good defense is critical to success in any endeavor but is especially true in the markets. Those who got caught up in the enthusiasm in 1999 and early 2007 can attest to the value of good defense. Buying high multiple stocks in hopes that someone will pay you an even higher price leaves you open to catastrophic wealth destroying declines like we have seen in stocks like Netflix (NFLX) and Green Mountain Coffee Roasters (GMCR). Investing in stocks where there is evidence of fraud or a bad business model like Apollo Group (APOL) or Enron is poor defense and can destroy your chances of winning the investing game. The first job of a long term investor is to survive. Focusing on safe and cheap stocks allows one to survive and hopefully thrive over long periods of time.

When you play defense by focusing on safe and cheap the three run home runs will come in and of themselves. Throughout my career I have purchased stocks because I thought the downside was limited and the business prospects solid and seen the stocks soar by many multiples of my purchase price over time. I didn't buy Kimball International (KBLAB) last year expecting the stock to double in six months. I bought because it was a decent collection of businesses trading at a cheap price and solid balance sheet. The fact that the market recognized the rapidly improving fundamentals as quickly as they did was bonus. I didn't buy shares of Forest City Enterprises' (FCY) exchange-traded debt in 2008 because I thought it would quadruple over a few years. I bought them because they were so cheap that I would earn a profit even if the company liquidated in bankruptcy. The fact that the shares have risen by more than 400% -- and never missed a payment -- is a home run produced by careful pitch selection and a "safety first" mentality.

One of my favorite screens allows me to look for stocks where I can select my pitches carefully, pay attention to defense first and, perhaps, over time hit a long ball that adds to my overall returns. When I sat down this morning and looked for stocks trading below book value that are profitable (and have solid balance sheets), I found some names worthy of my Earl Weaver portfolio. These stocks are not new ideas but they are safe, cheap and could return multiples over time.

Corning (GLW) is still on the list and remains one of my favorite stocks for the long run. The stock trades at 90% of tangible book value and has more than $6 billion in cash on hand. They could pay off all their debt and still have more than $3 billion. The company is profitable and pays a dividend of about 3%. Given the company's business lines its glass and fiber products will make Corning a growth stock when the economy begins to recover. They have exposure to smart phones, the medical and biotech industry, flat screen TVs and broadband networks, all areas expected to experience high rates of growth over the next decade.

Mineral sands and pigment company Tronox (TROX) has seen its shares fall off this year as a result of weak demand for its products. However, there are signs of recovery ahead as the oversupply of the white titanium oxide pigment used in paints and plastics is being whittled down. The stock is a little higher than my original recommendation and purchase but still trades at 90% of tangible book value. The balance sheet is solid with a third of the capitalization in cash and a current ratio of over 5. As a bonus, the stock yields more than 5%.

Pitching, defense and three-run homers win baseball games. It can also help you beat the market and build wealth over time. Thanks Earl!

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