The other night one of the major financial papers had an article on its web site advising investors that they should stop trying to hit investment home runs and settle for single. The basic idea was to take a more conservative approach to selecting stocks and look for lower-risk stocks that would capture much of the upside of the market and perhaps lose a little less during a major decline.
I think that's horrid advice. Great investors, like great hitters, go to the plate looking for a good pitch with the idea of making sound contact. Sometimes it's a single, other times it's a double or even a home run. The idea is not to select what kind of hit you want to get, but only to swing at pitches that allow you to make solid contact and drive the ball.
Earl Weaver, the legendary former manager of the Baltimore Orioles, once said that the secret to winning baseball games was pitching, defense and three-run home runs. Peter Lynch put that into baseball terms years ago when he said in an interview, "I've always loved baseball and the 10-bagger is two home runs and a double. You don't need a lot in your lifetime. You only need a few good stocks in your lifetime. I mean, how many times do you need a stock to go up ten-fold to make a lot of money?"
If you don't hit the occasional three-run homer, you simply will not win many baseball games, and if you don't have a few three-, five- and 10-bagger stocks over your career, the chances that you actually outperform the markets are pretty slim.
Going up to the plate focusing on hitting singles is probably not going to change the number of times you strike out or pop up to the infield. Accepting lower returns and just looking for base-hit stocks is probably not going to change the number of times an earnings miss, product failure or bad market condition turns your line drive into a double play.
As individual investors, we have a massive advantage over institutions that have to deal with massive career risk when picking stocks. They can't buy a bunch of stocks such as Unisys (UIS) and Volt Information (VISI) that have the potential to double, triple or more, then wait for that to happen and even buy more as they decline in the short term. That kind of investing can get a fund manager fired. It can make us wealthier by having the patience and fortitude to wait for the ball to clear the fence eventually.
The other advantage is something I wrote about earlier this year. Like Ted Williams, we can figure out which part of the strike zone will give us the higher reward and wait for a pitch in the sweet spot before swinging. For me, the ultimate sweet spot is a community bank with a sound loan portfolio and strong balance sheet that is trading at 85% or less of book value with an activist investor involved. Until I get that exact pitch, I can just stand there with my bat on my shoulder and wait until I see it. Best of all, there is no umpire to call balls and strikes, so I can wait as long as it takes. When I do swing, I don't know how far it is going but I do know that my batting average is going to be very high on pitches in that part of the zone.
Not every pitch is going to leave the park and not every stock you buy will give a return measured in multiples and not just percentages. There still will be times when the ball just doesn't bounce your way. However, your winning percentage will be a lot higher if you determine your investing sweet spots and only swing away when the pitch is in your zone. Everyone's zone is probably going to be a little different. I suspect that a growth stock investor has a much different sweet spot than I do, but both our batting averages will be higher if wait on our pitch.
Playing good defense in the stock market is not a matter of accepting lower long returns. It is more a matter of waiting for the right pitch to hit at the right time. Put your capital to work when the chances of a home run are high. Mickey Mantle once noted, "Somebody once asked me if I ever went up to the plate trying to hit a home run. I said, 'Sure, every time.'"
Invest like Mickey. Wait for the pitch and hit it hard. They won't all go out. But some will, and that will make all the difference.
