I’ve mentioned this before: I’m a big baseball fan.
I played baseball every single spring and summer for 25 consecutive years – ages 5 through 30. From little league all the way through college and 10 years on the adult league circuit, I played first base, outfield, and pitched. To this day I consider myself a devoted baseball “guy.”
As I’ve progressed throughout my career in finance, I’ve noticed a lot of similarities between success in baseball and success in investing. Admittedly, it might be because I think about baseball so much that it’s permeated everything else in my life, and now I can’t keep it out.
But honestly, the way that successful baseball players approach the game is strikingly similar to the way that successful investors manage a portfolio. When it comes to preparation, mental approach, strategy, and execution, many of the factors that drive success in baseball directly apply to investing.
Here’s five of them:
1) Develop a Routine
Baseball is an extremely mental game that takes a great deal of focus.
Picking the ball up out of a pitcher’s hand, detecting the spin on the ball and where it might cross the hitting zone, and deciding whether to swing takes only a fraction of a second. It takes absolute focus and a clear mind in order to be successful.
Professionals talk about how when they’re “in the zone” all the noises from the crowd are drowned out and everything in their peripheral vision fades away. The only thing that registers in their brain is the pitcher in front of them and the ball approaching the plate.
But reaching that point of ultimate focus is not easy. You can’t flip a switch and turn it on every time you walk to the plate. As human beings, we have a limited amount of focus and mental energy. We only have so much bandwidth.
So in order to replicate that narrow focus point as a player, you’re taught to take away all the distractions and develop a routine. The route you take the ballpark, the way you tape up your wrists, and the way you warm up and stretch are all a routine. Your approach is methodical and unwavering.
The idea is that when you have a routine, you can repeat it over and over again. You rehearse your routine so many times that it becomes a habit. After a while, you can almost perform your routine unconsciously. 100% of your mental and physical bandwidth can be saved for the upcoming competition.
In other words, your goal is to eliminate any “moving parts” that might take up extra space in your mind.
Successful Investors Also Adhere to a Routine
When you look at the Warren Buffetts of the world, the George Soros and Peter Lynch type characters who are some of the most successful investors in the world, they don’t make knee-jerk investment decisions.
These investors are calculated. They have a clear objective, a clear amount of risk they’re willing to take, and an unwavering long term strategy. They are process oriented and don’t deviate from their plans.
The terminology is a little different in investing. Routines are known as “institutionalized processes,” and “investment policies.” But the approach and philosophy are exactly the same. Successful investors have a set way in which they monitor their portfolio, how they evaluate investment opportunities, and how they make changes over time. Their approach is methodical. They rely on their processes to eliminate moving parts and save their mental energy for more important tasks.
2) Take Emotion Out of the Equation
Over the course of a baseball season, there will be some great moments and some not so great moments (we all hope for more of the former). Hitting a game winning home run always has you feeling pretty good about yourself after the game. Striking out with the bases loaded in the 9th doesn’t.
And along with developing a routine in order to preserve your limited focus, players are taught to control their emotions. “Never let the highs get too high, or the lows get too low” is how the phrase usually goes. “You’re never as good or as bad as you think you are.”
Again, the idea is to develop a consistent approach in order to reach your ultimate focus point. By balancing your emotions (no matter how good or bad they are) you’re able to recreate a consistent mindset for every single inning and every single at bat. Allowing yourself to ride the emotional roller coaster makes it harder to recreate success; you feel different every time you step up to the plate.
Investing is the EXACT same way. The market will go up and down over time – it’s the nature of the beast. When the markets have a good month and your account is up 10%, it’s easy to feel overconfident and want to invest more aggressively. Likewise, it’s scary and painful watching your account lose 20% or more. It might be so painful that you want to liquidate your shares, take your chips and go home.
These highs and lows cause many people to deviate from their long term strategy. In the investing world, this phenomenon is called a “behavioral bias,” since it causes us to make decisions emotionally instead of logically.
And just like baseball, successful investors are able to take the emotion out of the equation. Rather than making decisions based on where they are on the “roller coaster,” they’re able to execute a strategy consistently that’s based on facts, statistics, and research.
Prime Example: Market Timing
Market timing is a classic example of a “behavioral bias.”
I met with a prospective client a few months back who had a sizable chunk of money sitting in cash. He felt obligated to invest his cash somehow, since it was sitting in the bank earning practically nothing. But he was petrified that the markets would turn and his account would lose value.
He asked what my investment philosophy was, so I explained how I went about managing money. I talked about how I build portfolios based on custom asset allocations. I also talked about how I select securities and manage taxes and transaction costs.
I also talked about my belief in investing for the long term.
“I like to start with an asset allocation when I build portfolios for clients. And once we develop an allocation, we only make smaller, gradual changes over time. There might be a few short term, tactical shifts here or there. But for the most part any short term trade is an attempt to time the markets. And timing the markets will hurt you more than it helps you.”
“I’ve heard that before. And I definitely don’t want to time the markets or anything. I just want to wait to invest until I feel more comfortable about where the markets are. Everyone on the financial news is saying that we’re about to have another correction.”
Even though he says he doesn’t want to time the markets, his emotional fear of loss is pushing him to do just that. Waiting for a more opportunistic time to invest is another form of market timing.
Scores of research shows that it matters less when you’re in the markets. What is far more important is how long you’re in the markets.
We discussed this idea and reviewed some of the research (Charles Schwab has a good piece on this subject). I also suggested that he consider a lower risk portfolio.
“There’s no need to jump into high risk stocks if you’re not comfortable with the possibility they might go down. Why not build a low risk bond portfolio? It’d kick off more income than what you’re getting in the bank, and stock market corrections wouldn’t keep you up at night.”
He was torn. He knew that by keeping the money in the bank inflation would eat away at his purchasing power over time. He knew that postponing his investment wasn’t in his best interests. But he felt so uncomfortable putting the money at risk that it took a leap of faith to do anything differently.
In the end, I helped him set up a portfolio with a very healthy bond allocation. He did want some exposure to stocks, so we included some blue chip, large cap shares and utilities that pay consistent dividends. Ultimately, he was able to manage his emotions and make a logical decision based on facts.
3) Let the Ball Come to You
Every hitter has an area of the strike zone where they prefer to hit the ball. For most players it’s about belt high, over the middle of the plate and slightly inside (middle-in, in baseball speak). This “sweet spot” is the area where a hitter is most comfortable and confident.
Most hitting coaches will try to teach young baseball players to “wait for their pitch.” Since you have three strikes to work with, it makes sense for hitters to be very selective early in the count. If a pitch isn’t in their sweet spot, they have the luxury of watching it – even if it’s a strike. Players are taught to wait for a pitch they can do damage with. “Be patient.” “Let the ball come to you.”
In the investing world, you have the luxury of taking a lot of pitches. You’re never obligated to invest in that hot new real estate deal, or fight to grab a few shares of the latest IPO issue.
And when you take another look at the careers of investors like Buffett and Lynch, they’ve taken a TON of pitches. They have a strategy. They have certain criteria they look for when deploying investment dollars. They let the ball come to them.
There will be thousands of investment opportunities that cross your desk over the years. Successful investors are patient and wait for the right idea that fits their strategy.
4) Control What You Can Control
As human beings we only have so much we can handle at one time. When our lives seem hectic, our focus is pulled in many different directions and we’re forced to juggle many different things simultaneously. In baseball (and all sports), it’s easy to get bent out of shape over things that don’t go your way. Maybe it’s the weather, or a call an umpire made, or an who outfielder made a great catch on a ball you hit in the gap.
If it’s something that you can’t control, it makes zero sense to spend time worrying about it. To be successful, your focus should be squarely on the issues you can control that affect your success. You don’t have the bandwidth to be concerned about something you can’t control. Who cares if it’s raining? Both teams have to play on the same field. So what if the outfielder made a great catch? You can’t control how he plays. All that matters is how you play.
In investing, you cannot control what the markets do. You cannot control which way interest rates are headed. You can control whether you react to them emotionally or logically. And you can control your strategy. You can control how you go about pursuing it.
There’s a lot to consider when managing a portfolio. Why waste energy on something you can’t control?
5) Don’t Swing For the Fences
Anyone who’s ever put on a little league uniform has probably heard this one. Hitting home runs is a heck of a lot of fun, but it never works out when you try to hit home runs. Swinging too hard can make the path of your bat too long, and your head is more likely to be pointed toward the sky rather than where it should be: watching the ball hit your bat. You’re far more likely to swing and miss or hit a pop up on the infield.
This happens all the time when a team brings in a soft-tossing pitcher. The entire lineup licks their chops to get to the plate, so they can swing as hard as they can hoping to mash a dinger.
Coaches will tell you that the best hitters in baseball never try to hit home runs. Their goal is to square a ball up by hitting line drives. And sometimes, when you get underneath the ball a bit, it will leave the ballpark. But when that soft-tossing pitcher comes in, the temptation is often too great. Hitters abandon their game plan and swing for the moon.
In investing, swinging for the fences is just like getting caught up in a hot trend or stock tip. In the early 2000s many people were making money hand over foot trading profitless dot com stocks. And at the time, it was hard to avoid the fad. It’s not easy to stay focused on a long term when your cousin and your neighbors are buying new cars, boats, and other toys with profits they made overnight.
But as you know, thousands of “successful” traders went bankrupt after the bubble popped. Investors who stayed the course and didn’t give in to temptation did very well. Others who were allured by the “get rich quick” opportunity struck out.
As I’ve heard from countless coaches, don’t swing for the fences. Try to hit line drives and good things will happen.