I make no secret of the fact that I hate the Boston Red Sox. I know that fans of all the other teams in the division hate the Yankees, but that is like hating Lex Luthor or Snidely Whiplash. It is just too easy.
Boston has one of the best ballparks in the history of the game, passionate fans and a rich baseball history, so it makes a worthy archrival. Boston also has had some of the greatest players in the history of the game, including the best hitter of all time. You can make a case for players such as Rogers Hornsby and Ty Cobb, but given the era in which he played, Ted Williams is the best hitter in the history of baseball for my money.
Ted Williams broke the strike zone into 77 zones based on how well he hit pitches in that part of the zone. He then waited for a pitch that was in his highest average zone before swinging. He didn't chase balls low and away or on the low inside corner, where he didn't do as well as in the middle of the plate or up and in. He waited for a very good pitch where the odds favored a successful conclusion. That is exactly the way investors should approach the market.
As investors, we have a significant advantage over ballplayers such as The Splendid Splinter -- a point once seized up by Warren Buffett. If a pitcher successfully painted the low outside corner to get two strikes on Williams, Ted would have had to chase the next pitch to keep the at-bat alive or he'd strike out. In investing, there are no balls or strikes. During a speech at the University of North Carolina, Buffett said, "In investments, there is no such thing as a called strike. You can stand there at the plate and the pitcher can throw a ball right down the middle, and if it is General Motors at 47 and you don't know enough to decide on General Motors at 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." The market cannot paint the corner on us, so to speak, as we can let everything go by until we get a pitch to hit.
As an investor, you will see a lot of pitches during your career. There will be hot stocks, hot tips, great stories and guaranteed-to-work ideas. The Wall Street sales machine, the financial media and your brother-in-law will be throwing these low-and-away and just-a-bit-outside ideas at you your entire life. Most of the time swinging at these will lead to underperformance.
Whenever I use this quote, I am asked what a fat pitch looks like. How do we know when it's a hanging curve waiting to be smacked onto Eutaw Street and not a Clayton Kershaw curve ball that's going to drop like a stone just as we swing? The key is to study and test all the time and read Securities and Exchange Commission filings and other useful resources every day.
History can give us some indications of what a fat pitch looks like. A full-on market panic is a fat pitch, and if you look back at the 2008-2009 period you will notice that one could have purchased stocks such as Disney (DIS), Microsoft (MSFT) and Home Depot (HD) for below $20. CBS (CBS) and Southwest Airlines (LUV) traded in the single digits. Bad markets will give you the fattest pitches you will ever see, and investors who have cash and courage during a bear market can swing away until their arms give out and become wealthy in the process. It is like hitting against Phil Niekro when the knuckleball wasn't working.
Community bank stocks that trade below book value and have strong balance sheets and solid loan portfolios are usually a fat pitch. Insurance companies below book with above-average returns on equity historically have been fat pitches. So are financially strong real estate investment trusts (REITs) that trade at a steep discount to net asset value. Companies that are buying back stock when their stocks trade below book value and have an F-score of 5 or more are a fat pitch according to my recent research.
These are some of my fat-pitch definitions. A momentum investor might say a company that is growing sales and profits at an above-average pace and is seeing its stock rise faster than the market averages is a fat pitch. Your version of a fat pitch may be different than mine based on your investing personality and style, but once you figure out what your fat pitch is, you only should swing when you see it.
Not all of them will leave the park. There will be lots of singles, doubles and triples. Some will be long fly balls or even sharply hit double plays. But if you wait for your pitch to swing, your investment results will be a lot better than the average investor.