Analyze, Adapt, Re-Evaluate the Situation
A batter who stays in the lineup for a full season will dig into the batter’s box close to 700 times from the first week of April through the last week of September. They face different pitchers in different situations four times a game. Batters continuously try to figure out a pitcher’s tendencies. What type of pitch do they like to throw when the count is in their favor or not? Do they start each at bat with the same pitch (fastball vs. curve, etc.)? Do they like to work the inside or outside part of the strike zone? Pitchers think similarly. How has this guy fared against me in the past? Does he swing at the first pitch often? Does he like to pull the ball or hit it to the opposite field? Will his approach be different this time than it was his last at bat? There are dozens of micro games within the game, from one pitch to the next.
An investor trying to maintain wealth or grow it also needs to continually re-evaluate the situation – though less frequently than a ballplayer might. What is my current asset allocation compared to my target for the risk/reward tradeoff I’m willing to make? How will investment opportunities change over time? Is there enough expected return to compensate for taking risk? How do interest rates impact stocks, and bonds? Are international investments helpful additions to a portfolio? How much can I withdraw from this account over time to supplement my retirement income?
Each of these questions deals with aspects of money management that have some cyclical variability. Things change over time, sometimes overextending their progress in one direction before changing again. Investments and baseball players are streaky and volatile. Home run kings may hit 12 homers one month and three the next. Even the league batting champion will have a 0-for-20 stretch during the season. Baseball, more than any other sport, demands players to tolerate failure, to adapt to adverse circumstances. The best batters fail 70% of the time. As of this writing, only eight players in the National League had batting averages above .300.
Investing can be similar. Nobody bats 1.000 where every investment is a winner. Some very good investors can be out of favor with current market trends. Even Warren Buffett has been accused of losing his touch from time to time. For every 10 companies that even a good stock picker chooses, one will generate an exceptional return, three or four will perform pretty close to the broad market itself, and the other five or six may lag. If the one great investment outweighs the five or six that don’t work out, it’s a good result. Get two exceptional picks out of 10 and investors will seek you out and hand you money to invest even without you asking for it.
But the market cycle and investment opportunities change. The money managers have to either adapt to it or trust that their process is strong enough that they may trail the market for a period but over time they will win the “loser’s game.”
The best way to deal with the variable nature of investment outcomes from quarter-to-quarter, year-to-year is to follow a documented investment strategy that is specifically aligned with your goals. A written investment policy statement should identify your objective and your target weights for stocks vs. bonds, international vs. U.S., reflect your tolerance for market fluctuations and define how you will navigate the portfolio over time with rebalancing and periodic re-assessment of risk vs. return.
In their own way, baseball teams apply similar stated policies and organizational philosophies that they teach from rookie ball all the way through their minor league system to the major leagues. Teams have documented approaches for batting philosophy, handling of pitchers, payroll management, and so on.
Takeway: There is no such thing as an “all things equal” or constant environment. The situation changes continually and you need to re-evaluate to determine what level you need to adapt your plans or expectations.
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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