Markets declined in March. International stocks went down most, followed by US small-cap and large-cap stocks. Bonds did the best on a relative basis. So far for the year, the results are mixed, with small-caps leading.
The National Pastime
Last week, the Major League Baseball season began. Synonymous with the start of spring, it represents our collective emergence from winter, longer days, warmer weather, and spending more time outside. Coincidentally, success on the baseball field and successful investing have multiple parallels:
- Pitch Selection Matters – Arguably the best hitter of all time, Ted Williams hit 521 home runs and had an astonishing .482 on-base percentage over a 19-year career. While not easy to execute, his strategy was very simple – swing only at the best pitches to hit. For Williams, this usually meant he was looking for fastballs over the very middle of the plate and taking pitches that he didn’t like. While this didn’t guarantee a successful outcome every time, he knew it gave him the best probability. As investors, we are allowed to do nothing and watch. With tens of thousands of options, if an investment doesn’t meet our criteria, we can let it pass and wait for the next one. In fact, our team has a filter for reviewing potential investments — our way of looking for the very best pitches to hit. In baseball, hitters sometimes have to swing, but with investing, there is more freedom to let unattractive pitches pass by.
- Homeruns > Batting Average – Over time, baseball strategy has evolved. Decades ago, offenses relied on making contact, base stealing, and productive outs in order to score runs. More recently, hitting home runs has accounted for a higher percentage of runs scored. As technology, data analytics, and pitchers have improved, it has become harder to get on base and produce lasting rallies. So instead, hitters have focused on taking advantage of mistakes and hitting the ball as far as possible, while also striking out more. Hendrik Bessembinder, a professor of finance at Arizona State University, found that the stock market also works this way. In fact, his study showed that only 4% publicly-traded stocks have produced all of the net returns to stockholders since 1926. The remaining 96% collectively matched the return of a 1 month Treasury bill, reinvested over time. In other words, most stocks strike out, but the few that don’t more than make up for it. Having exposure to homerun-hitting investments helps improve results over time.
- It’s A Long Season – Last season, the Milwaukee Brewers finished with the best record in baseball, with 97 wins and 65 losses. This means that they lost around 40% of their games. In fact, they had both a 14- and 11-game winning streak during separate stretches of their season. During the 132 remaining games they played, the outcome was roughly the same as tossing a coin. If you’re a baseball fan, you’ve probably learned not to live and die with each day’s game because losing happens frequently. Wins are more fun to watch, but tomorrow is always another day. Investors should take a similar approach to their investments. While it’s not bad to watch the markets daily (we do!), perspective is helpful. Some days are up, some are down, there are winning streaks and losing streaks, but the results are determined over long periods of time.
Whether you watch any baseball or not, we hope that you enjoy this spring season. We are always available to discuss your investment portfolio in more detail at any time.
