Building a Team, or an Investment Portfolio
Baseball is broken into three disciplines – pitching, hitting, and defense. Good pitching can dominate good hitting but even the best pitchers have moments of vulnerability when they have to rely on their defense and hope their team’s offense can support them.
Every team needs a mix of power hitters and good on-base percentage batters. Home runs are welcome and thrill the fans but they are fleeting – a lot like the performance of stocks. Pitching and defense make it easier to win championships. And you have park factors to consider. Stadiums vary in favor of pitchers (San Diego’s Petco Park, Seattle’s Safeco Field) or hitters (Great American Ballpark in Cincinnati, Globe Life Park in Texas).
To build a winning team you have to find the right mix of talent, placed in roles that make each individual more likely to succeed, and have prospects emerge alongside stars who continue to set a lofty standard.
There is a mix of art and science in building ball clubs, just the way there is in managing the right mix of investments – your asset allocation. How you weight stocks vs. bonds/cash, international vs. U.S., growth companies vs. value companies, long-maturity bonds vs. short maturities, and so on is very important to your investment outcome.
And all the work you put into building the right team, one with a higher probability of success than others – is still impacted by the influence of luck. In any endeavor where luck is involved, you have to trust in the process and its likelihood of success over time more so than the outcome of a single game, or certainly a single inning.
Sometimes, a good result will come from a bad process (luck). For example, a batter is jammed by a quality pitch and breaks his bat, only to have the ball fall between fielders and drive in a game-winning run. Put another way, a good process can generate a bad result. The pitcher did everything right but it didn’t assure success.
Over time (adding up more investment occurrences or baseball at bats/pitches) a good process should yield a more favorable outcome and outweigh the occasional occurrence of luck. But there’s no accounting for when the luck will occur. Baseball player performance can run in hot and cold streaks. Investment markets can defy logic in both strong rising situations and crisis, thus the saying “markets can stay irrational longer than you can remain solvent.”
Regardless of the quality of process in building a baseball team, the worst team and the best team are each going to lose about 60 games and win 60 games on the 162-game schedule. As former Los Angeles Dodgers manager Tommy Lasorda used to say, it’s what you do with the other 42 games that separates playoff teams and cellar-dwellers.
Good teams will lose to bad teams several times a year. Good investment managers will lose some they thought they should win. They may buy at a seemingly good price
when growth factors look strong and a variety of other compelling reasons are present but the investment just doesn’t work out. The investment is not in favor of the market for whatever reason. On the flip side, some highly speculative, fundamentally unattractive investments will catch a spark of momentum and turn into big winners.
Because of the uncertain outcome of any given day’s game, baseball requires a long season to define the best teams. What appears to be true part-way – even most of the way – through the season, can change relatively swiftly. See the 1995 California Angels, 1964 Philadelphia Phillies, etc. Collapse of even a sure thing is possible, even if not probable. The baseball season is a marathon, not a sprint.
Investment choices should be the same. Most people are investing for a very long time horizon. The outcome tomorrow or even next quarter won’t have much influence on the longer-term. There are many decisions to make along the way that influence outcomes and potentially change the trajectory of your financial plan. You don’t need to overreact to short-term situations but you need to understand when an opportunity presents itself or when to protect against a specific risk you face. You need to recognize and adapt to longer-term game changers without responding with fast-twitch reactions to short-term distractions or the noise of the news.
Takeaway: A sound process will outweigh luck over time, but may not be helpful during any individual event.
Investing and baseball (Part 1) – What do they have in common?
Investing and baseball (Part 2) – Tony Gwynn and Understanding Probability
Investing and baseball (Part 3) – Statistical Analysis
Investing and baseball (Part 4) – Team building and investment portfolio
Investing and baseball (Part 5) – An insider’s perspective on the game
Investing and baseball (Part 6) – Ongoing re-evaluation and adaptation
Investing and baseball (Part 7) – Keeping scores can be a matter of perspective
Investing and baseball (Part 8) – The rarity of most valuable “players”
Investing and baseball (Part 9) – Fantasy baseball (growth vs value)
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