One of the most fundamental rules of investing is “to wait for the fat pitch”. That is, wait for an opportunity to hit the ball out of the park. Simple enough right? Not really – most investors find it hard to do nothing, even when there really aren’t that many good investment opportunities. Professional investors find it especially difficult to “do nothing” because they believe they’re being paid to do something. Well, in the world of investing, doing nothing is in fact doing something and professional investors don’t get paid for activity, they get paid to be right. If the right thing to do is not swing at the pitch then don’t swing at it. Your client is not going to care how “active you were” if you lost half their money.
Warren Buffet famously quips that he only really needs one good idea a year. Jim Rogers, another famous investor, says “don’t invest until you see the money lying there on the floor”. “Wait for the fat pitch” is in fact one of Jeremy Grantham’s core tenants of investing.
It’s sounds easy but it’s not. Humans are hard-wired to act – especially when they see other people getting rich making “easy money” in the stock market. It’s at this point that you have the strongest emotional urge to act – resist! For it is also at this point that the risk of losing money has increased.
This is the closest finance comes to having “a law of gravity” – the more expensive an investment becomes, the less return it can provide. If you see other people have gotten rich from it, it’s probably too late for you. While there are always exceptions, a good rule of thumb to keep in mind is “be fearful when others are greedy and greedy when others are fearful”.
In baseball you only get three strikes. In investing you can take as many “strikes” as you need until you see the fat pitch.
Not surprisingly Warren Buffet sums it up best (excerpt from his 1997 Berkshire Hathaway Chairman’s Letter):
“In his book The Science of Hitting, Ted [Williams] explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.
If they are in the strike zone at all, the business “pitches” we now see are just catching the lower outside corner. If we swing, we will be locked into low returns. But if we let all of today’s balls go by, there can be no assurance that the next ones we see will be more to our liking. Perhaps the attractive prices of the past were the aberrations, not the full prices of today. Unlike Ted, we can’t be called out if we resist three pitches that are barely in the strike zone; nevertheless, just standing there, day after day, with my bat on my shoulder is not my idea of fun”