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Step up to the plate: What baseball can teach you about investing

Another baseball season is upon us! Whether you’re a fan of the Red Sox, Twins, Rays or one of the other 27 major-league teams, you can likely get your baseball fix here in Southwest Florida. As it turns out, baseball and investing have a surprising number of things in common. From the structure of the game to its overall strategy, baseball can teach us all something about successful investing.

A baseball team consists of nine players playing the field, with the occasional designated hitter and relief pitcher thrown in. Think of your portfolio as the “team” and each investment as the “player.” The success of your portfolio ultimately depends upon your investments and how they perform. Proper portfolio diversification can be achieved through a combination of nine investment asset classes. Like baseball, strategically bringing in an investment (pinch-hitter or relief pitcher) can prove beneficial, depending on the economic environment.

Some players will perform better than others, and part of the manager’s job is to gauge this performance in terms of expectations of that player’s ability and relative to other players. The same goes when assessing the performance of an investment portfolio. Investors will trade poor performers and replace them with the “player of the month.” Can you imagine Cincinnati Reds General Manager Bill DeWitt trading Pete Rose in 1963 after starting his career 0 for 11? Investors often make suboptimal investment decisions due to short-term performance factors. Conversely, investors are prone to “chasing performance” while ignoring the consequences in doing so. Walt Dropo, first baseman for the Detroit Tigers, holds the MLB record for most consecutive hits (12) without a walk. However, that is Dropo’s crowning achievement. In the end, it’s Rose who is baseball’s all-time hits leader. Making rash investment decisions could cause you to miss the next Pete Rose.

The Splendid Splinter, Ted Williams, is considered one of baseball’s all-time best hitters. Williams hit .406 in 1951 with the Boston Red Sox, a mark that has not been eclipsed since. But did you know that in 25 career postseason at-bats he hit .200 with five strikeouts and no homers? When the chips were down in the games that mattered most, statistically, Williams’ was a below-average hitter. If you were presented with only the postseason stats and no player name, would you have guessed it was a Hall of Famer? Not likely. The successful investor realizes that even the best investments will get caught in a slump. The ability to weather these slumps and stay focused on long-term potential is what makes the difference. In hindsight, it’s easy to identify the best performing investments. Ted Williams is one of the best hitters ever, but you wouldn’t know it if you focused on that short, 25- game span.

The home-run is one of the most climatic events in sports. Who doesn’t love to watch a ball get launched 500 feet in a matter of seconds? Like the home run, who doesn’t enjoy owning an investment whose price ascends into the stratosphere? Baseball is filled with power-hitters, and Mark McGwire, slugger for the Oakland A’s and St. Louis Cardinals, fits the profile. McGwire averaged 36 home runs per year during 1987-1992. Over that period, he also averaged 113 strikeouts per year and hit .235 or under three times. Owning a McGwire is the equivalent of an investment that at times has you feeling like you can’t lose and whose ceiling is unlimited. Unfortunately, McGwire’s performance was also extremely erratic. As investors, we’re often enticed by the prospects of “power-hitting” investments. We convince ourselves that we can swing for the fences without considering the impact of striking out. Even worse, investors persuade themselves that they can predict when strikeouts will occur, only to end up walking shamefully back to the dugout. Owning the equivalent of a “McGwire” in your portfolio may make sense if you understand the risks that go along with it.

Being an investor is a lot like managing a baseball team. The season is long, sometimes grueling, and filled with winning and losing streaks. But with a proper game plan and consistent play, the end goal can be achieved. Now, let’s play ball!

Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor.


References

http://www.espn.com/mlb/player/bio/_/id/397/pete-rose

http://www.baseball-almanac.com/recbooks/rb_bstrk.shtml

http://www.espn.com/mlb/player/stats/_/id/28096/ted-williams

http://www.espn.com/mlb/player/stats/_/id/1738/mark-mcgwire


 Published in North Naples News

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