April 3, 2024

Lessons from the Plate to the Portfolio: Finding Your Investment Sweet Spot

There’s a correlation between many life lessons and investment lessons. Whether in life, business or investing, when we do what we are passionate about and are good at it, we can be exponentially more successful.

Ted Williams was one of the greatest hitters in baseball history with a batting average of over .400. Warren Buffet has shared that his average was so high because he’d only swing when there was a “fat pitch”. During Williams’ career, he outlined there are approximately seventy-seven strike zones on home plate and figured out which pitches he was the best at hitting. Waiting for a pitch to be thrown in his sweet spot increased the chances of getting a hit. With this knowledge, he wasn’t afraid to not swing at pitches—passing on low probability opportunities—and swinging when there is a high probability of a hit. Buffet does the same with investing. This practice takes patience; however, everyone can still experience a missed “at-bat”. The advantage of investing is that you don’t have to swing at any pitch, you are not out after three strikes. You also don’t have a split second to swing.

I have been investing for decades. I have made plenty of errors and tried a number of different strategies. During that time, I have reflected on my successes and mistakes to uncover my strengths; what I enjoy, what I understand and where I have done well.

I am committed to lifelong learning—whether that is educating myself on other companies or investors, or trying to take as much as I can from the many mistakes I have made. I have learned that I have had greater success when picking businesses that are already proven with outstanding returns. These are typically exceptional wide moat companies with competitive, durable, sustainable advantages when they were either out of favor because of market conditions or were dealing with short-term problems. Rather than dollar cost averaging, I am more comfortable with value cost averaging and holding them for long periods of time. This approach doesn’t work all the time, but it tends to work over time. I like to refer to these as forever quality value growth compounders.

On the other hand, I have also tried several strategies over time at which I wasn’t good. I spent an enormous amount of time reviewing over 750 of my public equity picks of over a decade, and we found that most of my mistakes were in one area; over 90% were in value traps (buying cheap, but they weren’t necessarily great businesses) and growth traps (speculative growth companies). I found it incredibly challenging to figure out which young companies would be winners long-term—although I had some significant success in doing it several years, it ended up being very costly lesson. Many great investors have found that you should make less mistakes because your winners will take care of themselves. Understanding this now, I can make wiser decisions that will help overall. I try to stay disciplined, doing my best to keep my emotions out of it. I am also working on setting parameters to best manage risk.

Peter Drucker, a renowned management consultant, once wisely said, “Most people see what they want to see, not what they are.” It’s about being intellectually honest, admitting faults and not just rationalizing what you did. Approach life with open eyes and a willingness to see beyond our own biases. It’s not only about doing smart things; it’s about trying to avoid doing foolish things.

I have made the oversight as an operator versus an investor thinking activity equals results. When I pick my own stocks, wide moat is where I do well. Outside of public stocks, I rely on managers who are experts in their area. When investing in private equities or real estate, I look for a manager with high integrity who possesses the three P’s: People, Process and Performance.

Investing is part business and part human nature—part science and part art. It’s needing to be the hunter in the woods; prepared to shoot versus chase (stretching). It’s important to have a watch list and have the process to duplicate. Charlie Munger encouraged ‘inversion thinking’ which is looking at each situation by turning it upside down to uncover all the reasons why you should not make an investment.

Investors improve their performance not through what they buy, but through what they exclude – by avoiding losers. When buying value stocks, the risk is a value trap when you hold a stock for many years and the intrinsic value doesn’t increase…or worse, it decreases. Value stocks are usually not wonderful businesses, which is why they’re cheap. When buying growth stocks, the risk is growth traps, which is when you pay a premium valuation multiple for a stock but then growth slows and the multiple contracts.

The ability to forecast short-term cycles is very hard and circumstances can change. It’s about finding high quality businesses and buying at attractive valuations that have the ability to grow and prosper long-term. Let the magic of compounding work.

It’s much safer to buy proven companies with strong, consistent and predictable results. The S&P 500 and Dow Jones prove that buying the best businesses in America produces attractive investment returns over extended periods of time. Buffett has demonstrated patience. Investors can do very well buying these wonderful businesses when they become mispriced by the public markets.

Aiming to get rich fast or competing in areas where we have a disadvantage is a way to get beat badly. When trying to hit home runs it’s imperative to learn what we’re good at, where we have had proven success and what we enjoy. If we improve the process, we can increase the odds of having better results or outcomes. Be patient and have a long-term perspective. And like Ted Williams ‘swing’ when in your sweet spot.

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