You may have missed Scott Patterson’s column in last week’s Sunday WSJ (another good column buried on the weekend, Bill!)
Patterson used Ted Williams as an investing analogy: Many traders swing out of boredom and over anticipation, while Williams waited — really waited — for his pitch, rarely swinging at junk.
"As the major-league baseball season gets underway today, this is something that small investors can think about doing, too. It’s actually a time-honored strategy on Wall Street, and increasingly popular these days. It’s called waiting for "fat pitches."
In baseball, a fat pitch is one that comes right over the center of the plate and is easy to hit far. As Mr. Buffett once wrote of Mr. Williams’ batting discipline: "waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors."
In investing, waiting for a fat pitch means being patient — putting your dollars into a specific stock or market sector only when the value looks truly compelling."
The article interviews Paul Larson, equity strategist at Morningstar StockInvestor who outlined the 5 steps to "fat-pitch investing:"
1: Look for companies with "a wide moat" that keeps rivals at bay.
Stiff competition, while good for consumers since it lowers prices, but can be trouble for companies. Look for firms such as eBay, which dominates the online-auction business (at least for now), are able to control the prices they charge.
2: Always have a margin of safety.
Invest in stocks that are cheap relative to the rest of the market — a tough job, but not impossible. Look for stocks whose shares have declined, while their earnings prospects have remained steady.
3: There are no called strikes in investing.
The biggest risk when it comes to investing in stocks is that of losing money — sometimes all of it. Cash, however, is about the safest bet around. Holding cash is less painful than it was a few years ago, with the average yield on money market funds back above 4% and some certificates of deposit yielding more than 5%.
4: Don’t be afraid to hold just a few stocks.
A controversial aspect of fat-pitch investing. Most money managers recommend that investors diversify their portfolios in order to protect themselves against big declines by a single stock or sector. Morningstar recommends investors hold a portfolio of 15 to 20 companies that they’re very familiar with.
5. Don’t trade very often.
Keeping trades to a minimum — say, one a month — forces investors to be more selective and also cuts back on quick decisions to bail out of a stock during a hiccup. Less trading also helps cut down on capital-gains taxes.
That’s good advice. Like last weeks discussion, this is especially true in this chop.
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Source:
Fat Pitches in Market Get Harder to Find
SCOTT PATTERSON
WSJ, April 2, 2006
http://online.wsj.com/article/SB114392880502914479.html
I would like to add that wide moats do not last forever. Mr. Buffett used to love newspaper stocks for their wide moats and local monopolies but a little thing called the Internet has drained a lot of water from those moats. I have been wondering lately if global warming and more intense storm activity could be making insurance a bad business to be in as they may be in for many more claims than they expect. Of course, they can just raise their rates, which in turn will have no effect on inflation, right Barry? ciao.
I like the baseball analogy because it’s a game that requires patience and discipline along with an ability to pull the trigger when the time is right…
The most challenging/gratifying aspect of investing to me is the mastery of one’s own emotions, not just the obvious (greed and fear) but also resisting the urge to make something happen (tough for type A personalities) in sideways or rangebound markets.
You definitely need to ‘let the game come to you’.
And Ted Williams is the best pure hitter that ever lived, BTW. Think any steroid riddled prima donnas will ever bat 400? Kinda doubt it…
“In baseball, strikes are called when batters don’t swing at pitches in the strike zone. But “investors can wait for the fat pitch. There are no called strikes,” says Paul Larson, equity strategist at Morningstar StockInvestor, a newsletter published by Chicago researcher Morningstar.”
Not entirely true. In fact, downright misleading. Since the stated purpose is to invest these funds, if you watch three pitches go by that are down the middle, and if you are earning below mkt rates and/or if you stash your cash in an institution that fails such that the FDIC only protects you in a limited fashion…well, you get the picture…