Successful investors invest with a purpose, keep their positions focused, and avoid trades that don’t offer an attractive risk-versus-potential-reward scenario.
That’s why you shouldn’t feel any pressure to invest based on every hot stock tip or market rumor. Instead, you should trust your model for analyzing investments, tune out the “noise” and make decisions based on the best-quality information you can find. And then, act only when you see that the odds and potential payoff are in your favor.
Avoid jumping on every tip that comes your way and above all be selective.
With the summer winding down and Major League Baseball’s pennant races heating up, I am going to use a baseball analogy to explain how selective investing works. That’s because successful investors manage their portfolios the same way Ted Williams approached hitting a baseball.
You may recall that I used the same analogy in my January 22 column. But with all that’s going on around us, it’s more important than ever …
Williams was one of the greatest hitters in baseball history. He combined power (521 lifetime home runs) with patience (more walks than any other player of his era) and control (a .344 lifetime batting average).
He documented his legacy in a thesis on batting called The Science of Hitting.
Williams wrote that he would only swing at pitches when he knew he could usually connect and get a hit a high percentage of the time — places he called his success zones.
|Williams would only swing at pitches in his success zones.|
If a pitch was on the fringe, he would patiently wait for the next one. He knew that a called strike was better than swinging at a bad pitch, which could result in an out.
The lesson here, then, is that you greatly increase the odds of success with your investing strategy when you are selective and only swing when the odds are squarely on your side! That’s because …
In Investing, There are No Called Strikes
As Warren Buffett reminds us, “The great thing about investing is that there are no called strikes.”
You can stand at the plate and let the pitcher (Wall Street, in this instance) throw pitch after pitch right down the middle, and you don’t have to swing!
If, for example, the pitch Wall Street is throwing is the Sage Therapeutics biotech IPO at $18 per share and you don’t like the price or know enough to decide whether to make the trade — or if you know the odds aren’t squarely in your favor — you can let it go right by.
There is no umpire to call a strike. In investing, taking a swing is entirely at your discretion. If only it had been so easy for Ted Williams!
For you, there is only one way to strike out, and that’s if you swing and miss. So, there is no reason to swing unless you see the pitch you want.
An Example of Risk Control Through Selectivity
In last week’s Money and Markets column, I suggested that emerging markets are currently poised for big money-making opportunities. That’s why you may want to consider adding the Harding Loevner Emerging Markets Fund (HLEMX) to your portfolio.
Similar to Ted Williams’ approach to hitting, this carefully managed emerging-markets fund uses selectivity to control risk to earn superior investment returns.
HLEMX owns only 80 of the highest quality companies located in the emerging markets. By selectively investing in high-quality businesses with durable long-term growth prospects, HLEMX has logged a return of a bit more than 14 percent over the past year, which handily beat its index.
The fund’s highly regarded portfolio managers, Rusty Johnson and Simon Hallett, have extensive emerging markets experience and will invest only when they see a pitch they like.