“I call investing the greatest business in the world … because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
—Warren Buffett, Interview in Forbes magazine (1 November 1974)
“The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’”
–Warren Buffett, 1999 Berkshire Hathaway Annual Meeting, as quoted in The Tao of Warren Buffett by Mary Buffett and David Clark p. 145
The best players in baseball are called out 70% of the time after hitting the ball. Investing like baseball is a process of failure. Just like in baseball, investors don’t have to swing at every pitch. For example, if a batter hits .400 on fat pitches right over the plate and .125 on low-and-away curveballs, any coach is going to tell the batter to wait for their right pitch. This is also true in investing. Why swing at crafty curveballs on the outer half of the plate when one doesn’t have to?
What fat pitch investing is all about is to wait for the types of stocks that one has a high probability of hitting out of the park. Are these going to be stocks with abnormal risks like Herbalife (HLF), Nu Skin (NUS), J.C. Penney (JCP), Twitter (TWTR), or that penny stock you read about the other day? Probably not – these stocks are curveballs. Sure, you may get lucky and get a nice piece of the ball when swinging at these, but they’re not as easy as, let’s say, swinging at Apple (AAPL) when it was at a split-adjusted $60 per share, or taking a hack at Altria (MO) when it was under $30, or swinging at Microsoft (MSFT) when it was in the mid-$20s. Those fat pitches right over the plate — we call those stocks Valuentum stocks.
Quite often, investors are screaming, “Swing, swing, swing. I don’t feel like I’m investing unless I’m doing something.” It’s okay. This is natural. But one of the most important pieces of wisdom that you can accept in the stock market is that you don’t have to swing at everything. It’s okay to be patient. It’s okay to wait for your pitch. In some respects, paying to be patient could be the most valuable part of any investing service. Perhaps needless to say, one or two great ideas are better than three good ideas mixed in with two big mistakes. Warren Buffett knows this. I know this. And I want you to know it, too.
The very best portfolio managers on the planet are missing out on hundreds of stocks that performed better than his or her portfolio as a whole because they are curveballs. These portfolio managers don’t care. The point of investing is to achieve specified goals, not getting every single call correct or taking a hack at every pitch. Swinging at everything (as in playing every hand in Texas Hold’em) is going to result in you striking out. We do our best to outline this dynamic in the e-book:
If you are a good investor, your winners will outperform your losers, and you will make money. If you’re an excellent investor, you’ll still have a lot of losers, but you’ll end up beating the market.
Some of the best hitters in baseball had one thing in common. From Ted Williams to Babe Ruth to Barry Bonds, they all had excellent eyes at the plate. Ty Cobb once said, “Ted Williams sees more of the ball than any man alive – but he still demands a perfect pitch.” As an investor looking for the next incremental idea, as a fund manager looking to generate alpha, or as an advisor tracking clients’ portfolios, you want to have a great eye. Just with anything, it takes work. You don’t want to swing at that hard-to-hit curveball. Let others swing at that curve ball on the outer half of the plate. It’s not your pitch.
What we’re trying to tell you is that it is perfectly fine to pick only one or two ideas over the course of several months. This is what we do. The beauty of investing is that no one is going to call you out when you don’t swing! You shouldn’t be checking stock quotes every second, or even on a daily basis. You shouldn’t be glued to CNBC or dying to get real-time quotes or up-to-the-millisecond information. You’re not going to beat the algorithmic traders, and if you’re playing this game, your transaction costs will eat you alive.
If you’ve been a member for a while, you know that we don’t trade often or rapidly. Even if we did, it’d be difficult for our membership to follow along and track our every move. The newsletter portfolios that we run are relatively easy to follow. If you take a week vacation, for example, odds are you’re not going to miss much. We keep all the archives open to members, and we publish a transaction log. We have a measured and repeatable process, and when we trade, we like to take a big hack at a nice fat pitch down the middle.
Today, we’re taking some hacks in the portfolios!
Best Ideas portfolio
1) We’re opening a 2% position in new issue Alibaba (BABA) on its open today. We think shares are worth more than $100 each. The firm was priced at $68 per share. View its 16-page report >>
2) We’re adding to the position in Google (GOOG). We’re allocating an additional 2% to the company in the portfolio. View Google’s landing page >>
3) We’re opening a 2% position in Gilead Sciences (GILD). We may add to it if it reaches our originally-intended entry point in the mid-$90s.
Dividend Growth portfolio
1) We’re opening a 2% position in Coach (COH). Though this idea is not without material risks, we think the firm’s 4% dividend yield will act as nice pricing support. We think downside is rather limited. You can watch my clip on CNBC here >>
2) We’re opening a 2% position in HCP (HCP). The firm is the first healthcare REIT selected to the S&P 500 and the only REIT included in the S&P 500 Dividend Aristocrats Index. View HCP’s landing page here. Shares yield 5%+. Omega (OHI) remains on the watch list.
Note: We continue to evaluate where we’d like to add energy exposure to the Dividend Growth portfolio after removing Kinder Morgan Energy Partners (KMP). Read more about the reasons for removal here. We continue to exercise patience in this regard, and as many readers know, we’re not huge fans of the master limited partnership business model. Read more on that topic here.
FAQ: A stock’s Valuentum Buying Index is based on our view of the attractiveness of a company’s DCF valuation, its relative valuation versus peers, and an overall technical assessment. If our views on any of these three investment pillars change, a firm’s VBI score will change to reflect this new view.
The Valuentum Buying Index does not change step-by-step (e.g. 5 to 6) as more than one dynamic can change at any given time. Remember: it is not purely a value-based system, nor is it purely a technical-based system. It has components of both and assesses the firm on its attractiveness at any point in time.
Contact us at +1 708-653-7546 if you require further explanation of the Valuentum Buying Index or with any other aspect of our research – how we calculate the fair value estimate or how we arrive at each firm’s Dividend Cushion ratio.