Yikes! Now I am resorting to positive comments about the Bosox. Don’t worry fellow NY Yankee fans! It’s only to make a point about the markets and investing.
The season is Fall and that means it is World Series time. This year’s match-up features the LA Dodgers versus the Boston Red Sox, who now lead the series 2-0. The purely baseball fan in me read with excitement the news about Game 2 Wednesday night. The statistics for Boston read like a smart, steady investor’s style: “sufficient but not overwhelming.”* Boston’s 4-2 win contained zero home runs. Rather, they beat their opponent “on a collection of timely singles and one spectacular catch.”
In my 31 years in the financial services industry I have heard these very wise baseball analogies used literally hundreds of times:
- “In our portfolio, we are aiming for a series of singles, not home runs.”
- “Grinding out base hits quarter-after-quarter, year-after-year is how to make money.”
- “Amidst Babe Ruth’s fame, he struck out 1,330 times – a legacy that at one time earned him the title ‘King of Strike Outs’… redefining failure.”
This last line possibly referred to the idea that swinging for the fences is extremely risky. (Although Babe Ruth did go on to hit 714 home runs, 3rd best of all-time.)
The point is that in finance, failure – or losing large sums of money due to market timing and risky stock selection – forces the portfolio to need to work harder to gain back those losses.
- Example: A 25% loss needs a 33% gain to get back to even. In dollars that means if a $100,000 portfolio goes down 25% to $75,000, then a $25,000 gain (or a 33% gain) is needed to get back to $100,000 breakeven.
Portfolios will lose money due to market cycles somewhat like the one we are currently experiencing. But by sticking to the “base hit” philosophy – which means NOT trying to time the markets and NOT betting on market sectors but rather investing in the entire global market spectrum over time – that is the way to keep scoring runs year-in and year-out.
None of this conversation should be earth-shattering news – similar to Boston’s win Wednesday night (I had to get in a Bosox dig!). But the comparison to baseball is valid. The Boston Red Sox’s mastery – for now – of a broad spectrum of basic skills has outweighed the “all-or-nothing” of purely focusing on going for home runs.
They may even win the World Series. Oh well.
*WSJ, Brian Costa 10/25/2018.