Williams came up with three rules to hit by that I think translate very well to value investing.
There are two things I look forward to every year end. Spending time over the holidays with family and friends, and digging into my large stack of books to read. This year I went to one of my favourite sources, Warren Buffett, and picked out a book he has spoken about in the past, “The Science of Hitting” by Ted Williams. The book itself is a quick read and unless you’re a baseball nut may be a bit too technical. I find it interesting looking at how people who have succeeded in their discipline approach it because a lot of time, these insights can be transferred into the world of investing.
Ted Williams played major league baseball for the Boston Red Sox for 19 years between 1939 and 1960 and went on to manage the Washington Senators and the Texas Rangers. Nicknamed “The Greatest Hitter Who Ever Lived” by some, he was a true hitting analyst and was always seeking knowledge to help him become a better hitter. He dissected his strike zone into a seven baseball wide by 11 baseball high grid and knew what his batting average was in each of the 77 areas of his strike zone. Williams came up with three rules to hit by that I think translate very well to value investing.
- Get a good ball to hit
- Proper thinking
- Be quick with the bat
1. Getting a good ball to hit
Ted Williams used his understanding of his strike zone to swing at balls in the areas where he hit the ball hard and had a higher average. In value investing, it’s very important to stack the odds in your favour and to swing only at the best pitches. We apply this in several ways in our investment process. We understand our own strike zone or circle of competence. There are companies that we understand better than others and by focusing on these opportunities we have a much higher probability of getting our investment thesis correct. We also make sure to buy businesses where the price adequately compensates us for the risk of the investment. The great thing about investing compared to baseball is there is no finite number of balls to swing at!
2. Proper Thinking
Williams talks about being prepared mentally when stepping into the batter’s box. Understanding the pitcher, what happened last time you were up and the stage of the game. For us, this translates into doing our homework and remaining rational when Mr. Market is exhibiting his more irrational side and a given stock trades at a large discount or premium to what our research has shown is intrinsic value.
3. Be Quick with the Bat
When opportunities present themselves, you need to act quickly and rationally. We strive to be highly opportunistic in our investing. The best way to do this is to be prepared for when investments present themselves. Investors frequently ask us how we come up with ideas. We usually track an idea for several years, collecting data and watching the business perform. These ideas only become investments when the market temporarily misprices them and give us the discount we want. When we get pitched the right price, we try to be quick with the bat!
David Barr, CFA
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