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Investment Lessons From the Wide World of Sports

By    |   Tuesday, 31 July 2012 07:26 AM

One of the greatest home-run hitters of all time, Babe Ruth, only had a batting average of .342. While this puts him in the top 10 hitters of all time, it still means that the Great Bambino completely missed two out of every three pitches that came his way.

If you make that many mistakes in investing, you’ll be wholly unprepared for retirement, if not flat broke.

Indeed, many investors have used baseball metaphors to better explain the craft of investing. Warren Buffett has infamously talked about waiting for a “fat pitch”— the very rare pitch that will end up exactly where you can knock it out of the park.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama For Mishandling Economy. See What They Did.

But, such opportunities occur only a very small fraction of the time over the course of your life.

Most investors take another clue from the great American pastime of baseball. They try to go all out and hit home runs, which in investing means the trade that multiplies in value.

I find this strategy to be a phenomenal impediment for investors. Why? For starters, those who see a potential home-run investment might be merely looking at the early development of the “next big thing.”

In investing, the next big thing usually isn’t as profitable as it seems.

In the 1980s, Motorola came out with the cellular telephone. Within a year, the U.S.-based company was selling phones at a loss, while Japanese competitors swooped in and could break even at half the price.

In the 1990s, the next big thing was Internet stocks. Their real profitability as investments didn’t occur until after the tech bubble collapsed and the weaker companies that went public without a plan to become profitable, went under.

Yes, it’s great to have foresight and identify future trends. But you also have to invest at the right time, in the right company and at the right valuation to make a profit. That’s the key to investment success — not shooting for the fences and mostly striking out.

In reality, investing should take on the longer-term approach of football. Unlike baseball, where the end goal is to get to home base, football is about the gradual conquest of territory.

It’s about facing often-brutal setbacks. It’s a grind. Indeed, football is a better sport for investors to emulate than baseball is. Rather than the unbridled opportunity of a home run, we face the tempered opportunity beset with the challenges of a quickly adapting market.

Instead of trying to hit a home run with one big investment, it’s about having a portfolio that allows you go on the offense or stay defensive in tough times.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama For Mishandling Economy. See What They Did.

During the past few weeks, we’ve seen a lot of market volatility. The investment environment is shaping up to benefit defensive investors. Keep an eye out for select buying opportunities in quality stocks that may take a hit — that’s when it’s time to go on the offense.

Until then, stick with safe, dividend-paying stocks, as well as options to hedge your gains, and get paid to wait.

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Tuesday, 31 July 2012 07:26 AM
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