What do you swing at?
November 24, 2010 § Leave a comment
First off, don’t worry folks, I wont be always using a baseball metaphor for every post. That would be neither fun for you or…uh..doable for me. Besides, I’m much more of a hockey guy myself, but hockey doesn’t lend ample metaphors for investing. I mean, you could maybe do something with defensive +/- stats and stock volatility, but that’s way less sexy. And it would probably be a horrible idea for a blog name.
Anyway. They wont all be sports analogies.
But for this post, it is. The famous baseball-investment analogy is that the market is like a pitcher pitching you prices–some are good, some are laughable bad while others are there–right there, floating down the alley with a big “swing batta” sign on them. And you know that good feeling you get in your soul when you connect right in the sweet spot. Well, if you get the right pitch you’ll be fist-pumping around the bases Joe Carter style (touch em all Joe!) in no time. And the investing lesson we are to learn is to wait patiently for your pitch. And the bonus is, you don’t strike out by waiting. (And if this baseball analogy is something you enjoyed, you can read more about why we are called Batting 450 here)
But this raises the obvious question: what is a good pitch?
Well, in baseball different hitters have different spots. Some like down-and-away, others like up-and-in but no one can hit it out of the park, anywhere, all the time. So the thing you need to learn about yourself as an investor is where your swing is and what pitches you are looking for. Where are you comfortable? What do you know? What part of the plate gives you the best percentage chance at connecting and putting runs on the board?
For myself, I tend to look for pitches that (roughly) meet three criteria.
1. Solid companies with a history of returning equity to their investors. I know. It sounds lame to say “I like to invest in good companies who make money” but its true. Don’t overlook the simple. Therefore I usually look for 5-10 years of +13% in ROE (Return on Equity)
2. Mispriced. For some reason or another the market has either read doom and gloom for a particular business, or they have ignored some good things, or the market as a whole has tanked, bringing this great company to a price that looks like a bargain. This is perhaps the biggest factor. If you can judge whether a company is worth the price being quoted, well my friend, you are gonna mash some taters.
This can sometimes be easier to do, especially if there is some super crazy crisis that is driving the stock price down. I mean, when BP went to $26 a share, it was a pretty attractive buy. Except for the whole disaster thing. And if you bought some then while everyone else was dumping shares, well you’d have made about 50% return right now. I didn’t swing, and I learned my lesson. (Lesson: follow your rules and don’t let emotion or opinions of others get in your head. Trust your swing.)
But not every company is going to go through some major crisis, so it’s not always going to be glaringly obvious. But discrepancies will happen. Look for em.
3. Dividend. Call me crazy, but I like being paid for taking a risk. There are plenty of studies out there that show that dividend stocks fare better than non paying stocks, but that doesn’t mean it will always be that way. But if I’ve bought it at a great sale price the dividend is icing on the cake. If I misjudged the sale and the price doesn’t rise that much (or, er…at all) then the dividend is a great hedge against my own innate ability to be oh so wrong. And I love hedging against that. You should too.
But if you are in this market, thinking about being in this market, or are a brand new investor baby like me, you need to sit down and think to yourself what your sweet pitches are. Write em down. Study others. Learn. Read. Heck, that’s what this blog is all about: me trying to learn my swing by writing it out, learning from you and getting it out of my head and onto paper (pixels?) so that I can grow and be better.
Disclosure: I don’t own BP. I mean, they did have to sell a bunch of money making stuff to pay for the whole spill thing. Oh, and also I don’t have any money. Like I said: new investor baby.