Investing–America’s Favorite Pastime

12698182_sI believe that there are a lot of life lessons to be learned from sports: dedication, determination, desire, and hard work, to name a few. These are all things that I want my girls to learn in their youth to carry with them for the rest of their lives. As springtime rolls around, they are all gearing up for the most popular sport in our household: softball.
With my oldest, Maeve, playing her first year of high school varsity softball as the starting catcher (as a freshman; yes, I am proud), and my younger two in their town and travel leagues doing very well, softball season requires a significant commitment from our whole family, but it is always worth it. What is spring if it’s not spent at the ballfield?
So I figured I would start the season off the right way, by taking my youngest, Sophie, to the Red Sox home-opener last week. We had a blast (even though they lost to the Orioles), stuffing our faces with hot dogs, popcorn and peanuts. The only thing better than enjoying America’s favorite pastime is enjoying some quality daddy-daughter time with my girl Sophie. Heck, at 13, she still thinks her dad is pretty cool.
As I sat there in the seventh inning watching our bullpen get smoked, I was again thinking of one of those life lessons learned from all sports: how to deal with failure. But you know, I also realized there are a number of lessons specific to baseball that can relate to the financial world. There are similarities between America’s game and Americans’ investment habits. In honor of opening day in Boston, I thought I would share some of those with you.
The first is that you should not swing for the fences. As I tell my girls, swing for a hit, not for a home run. It is all about the singles. Baseball is a nine-inning game, and it is important to focus on doing the little things correctly, rather than putting all of your effort in one powerful swing. Of course, watching Big Papi crush a ball over the right field fence is exciting, just as it is in the financial industry—having a big hit on a stock return. But any dedicated baseball fan knows that more games are won on a series of singles than on a walk-off home run.
Similarly, having multiple strikeouts in your portfolio because you are trying for a big hit can cause you to lose the game. Think of it this way. If you have your portfolio invested with the goal of getting big gains, and it takes a 50 percent hit, you lose half your money. Even if you gain 50 percent the next year, you are still only at 75 percent of your original portfolio value. In fact, if you lose 50 percent like so many did in the last major downturn, you need to earn 100 percent to just get back to even. That is one big run deficit in baseball and one big portfolio deficit in investing. Folks, those homerun swings often leave you with strikeouts, but the consistent, level swings can have a much more powerful effect on the scoreboard.
Also, remember that big names don’t always lead to the best results, in baseball or in the financial world. In baseball, your first four batters might sell the most tickets, but having a well-rounded lineup of solid hitters and fielders can lead to better long-term results than investing only in a few big names. Likewise, investors are often drawn to well-known names in the financial industry, but that does not mean that those big names will have the highest returns. In baseball, as well as in the financial world, substance, skill and strategy are much more valuable than celebrity status or bravado.
Another lesson learned from baseball that can apply to all investors is to not let people get in your head. “We want a pitcher, not a belly itcher…” “Hey batter, batter, batter . . . ” Baseball is full of hecklers, big talkers and “Monday morning quarterbacks” (not to mix sports metaphors). The investment world is the same way. There are a lot of people with opinions, shouting the “best” advice at you. Just as baseball coaches get paid good money for their expertise, good financial advisors do, too. Don’t let the loudest voices throw you off your game. Meet with an advisor to design a strategy, create a plan of action for implementing that strategy, and trust in the strategy for long-term success.
Ask the right questions, such as, have we stress-tested my strategy to see how it behaves in good and bad times, or what mistakes did we make in the past and what changes do we need to make to avoid those same mistakes? This is just like a great baseball player will ask a coach how to make changes to improve on the prior season.
Lastly, create a routine so you are prepared for whatever comes your way. If you watch a baseball game, you will see routines all over the field. Batters do this before they step into the box, pitchers before every pitch, even fielders entering their ready positions. Every moment is treated the same, ready for whatever is going to happen. This is critical for your portfolio, too. No one is absolutely certain what tomorrow will bring, so have a consistent strategy and a routine that prepares you for anything. Be ready to take advantage of upswings in good times, and protect yourself from losses in the bad times. Folks, always stay focused at the plate and be ready for any pitch thrown at you.
You know, I always tell my girls that you always think fastball, then adjust—in life and on the field. Because you need to be vigilant and stay alert; you never know when that curve ball is coming.