Readers of our column, listeners to our radio show and those close to us know that we are huge sport fans. We are especially fond of baseball, specifically the routine, symmetry and the fact that there is always hope due to the lack of a time clock. That said, the start of baseball season usually provides us with a lot of anxiety as we are fans of the New York Mets and ask ourselves why we couldn’t have been brought up Yankee fans. Ironically, some of the terminology utilized in baseball works well in formulating investment philosophies. We note some of them below.
DON”T SWING FOR THE FENCES! So many investors (especially younger ones) are looking for the home run. They want to day trade their way to financial freedom and are constantly looking for the next Google or Microsoft. Reality is that most baseball rallies are built one single at a time and that solid financial portfolios are built through diligence and discipline. Home runs can occur but mostly they come while you are swinging level and not trying to hit one. It is also important to recognize that some of the most prolific home run hitters also strike out the most.
SACRIFICE. In baseball many wins are constructed through the sacrifice bunt (especially in the National League which doesn’t utilize a designated hitter). Likewise, most investors are best served by making sacrifices and contributing on an ongoing basis to 401(k) plans and to Individual Retirement Accounts. These dollar cost averaging techniques take the market timing aspect and emotion out of the process and help investors build solid financial futures.
CURVE BALL. A prudent investment strategy requires a plan of action should your investment choice go down in value rather than up, as you had planned. What if the stock market or your investment throws you a “curve ball?” What are you going to do? How will you respond? Do you have a plan of action to rebalance your portfolio at a specific level or on a periodic schedule? Always expect the unexpected.
GOOD PITCHING ALWAYS BEATS GOOD HITTING. As we have witnessed over the past several years, sometimes the stock market goes nowhere. Sometimes there are limited opportunities. During these period of times, don’t lose hope. Keep your nose to the grindstone. Keep your eyes on the ball and over time, this will pay off.
THE THIRD BASE COACH. OK, this might be a stretch, but runners rounding third base are always looking for help and advice from the third base coach. Likewise, frequently investors are wise to get professional help especially when facing difficult decisions. The learning curve can be steep and costly should you try to invest on your own. As we have stated time and time again, experienced investors have a better chance at differentiating between an opportunity and danger. They tend to have a better feel for when to act rationally and when to act irrationally. We use the example of buying low and selling high. That flies in the face of rational thinking. Why would anybody move toward something that is down and out. The answer regarding investing is quite simple – investors should always try to buy potential and sell a lack of potential.
PINCH HITTER. Many investors tend to evaluate their investment portfolios during regular intervals. For instance at the end of every calendar quarter. The problem with this is that your investments know no calendar. They go up and down in reaction to different types of data, including that which pertains to the economy, corporate profits, geopolitical events, monetary policy, etc…. Investing is not a static situation. Rather it is evolutionary and sometimes revolutionary. Therefore, you need to be ready to act when the situation dictates. For individual securities, this may be at a moment’s notice. For mutual funds, this is most likely in response to an accumulation of data that would cause one to act. Either way, the calendar does not dictate when changes are warranted, among other criteria, the investing environment does.
THE FINAL SCORE. You’re the batter. You’re the investor. One way or another a pitch is going to be thrown. You have a decision to make. Do I swing at the pitch? Do I make the investment? If you choose to make an investment have a plan on what to do if it doesn’t work out. It you decide not to swing, always remember that unlike baseball, when investing you can pass on as many pitches as you want and only swing at those you think you can make effective contact with. There are no balls or strikes.
HOME PLATE. OK, you’ve reached your goals. You’ve achieved your objectives. Now, don’t go back. Try to protect your principal and remove some risk. Stocks have nearly doubled off their first quarter 2009 lows and now may perhaps be the time to scale back a bit of risk, especially if you will be in need of the principal over the near term.