March 28, 2022 | BY OUR PARTNERS AT EQUINUM WEALTH MANAGEMENT
With the baseball lockout finally at an end, we can actually feel Spring in the air. Aside from being the great American pastime, baseball allows advisors to abuse sports clichés to the fullest. From “make sure all your bases are covered”, to the great, “Singles and doubles as opposed to homers”, and finally, the ultimate, “we’re in the seventh inning of the bull market”, baseball clichés make for useful tools. Using these clichés may help clients stay on track and make sure nothing comes out of left field. They also provide a great lesson, shared by Warren Buffet via Red Sox great Ted Williams.
In his book ‘Science of Hitting’, baseball legend Ted Williams breaks down the strike zone to seventy-seven squares. He explains how his batting average is seriously impacted depending on where the pitch lies within that zone. The position of the pitch inside those seventy-seven squares can range from one that is his sweet spot – where he can hit .400, to a spot far outside his comfort zone, where a bad pitch could drop his batting average down as low as .230.
Standing at bat, Ted didn’t really have a choice about his swing. If he avoided the pitches that would most likely result in a lowered batting average, he would be called out on strikes. Although he would have preferred a “fat pitch”, he didn’t have the luxury of waiting for it.
With his remarkable story-telling ability, Mr. Buffet describes how as investors, we have a decisive advantage over baseball players. When it comes to investing, there are no called strikes. The only way to strike out is by making a bad investment. By ‘avoiding the pitch’ you may miss out on a great investment – but you won’t lose money. And of course, we have the luxury of waiting things out and staying on the lookout for that “fat pitch” of an investment.
Nevertheless, though Buffet’s baseball analogy is cleverly and accurately drawn from the Ted Williams theorem, the reality is that the economy really did throw us a real curveball. Inflation remained very low for many years in the face of various market and the Federal reserve changes. Sitting on one’s cash while waiting for the fat pitch wasn’t the worst choice an investor could make. But now, with inflation rates rising like an Aaron Judge moonshot homer, cash has become trash.
This certainly doesn’t mean that, as investors, we should just go out and swing at balls in the dirt. Rather, the savvy investor needs a proper plan in place so that his money acts as the devoted worker it is meant to be. If an investor wants to make it to the big leagues, he must make sure to craft an investment plan that is resilient and secured against any unexpected changes in the economy.