Money and Baseball

Interview with Bruce Hagan, 3-3-10

Of all the sports, baseball is generally considered the “thinking man’s game”. There are a myriad of rules and situations that occur in baseball, more than about any other sport. There also is time between plays to plan and implement strategy, and it’s a game of statistics. The same can be said about investing.

Let’s say the FSU baseball team, over the course of a season, averages scoring 6 runs per game, which is .66 runs per inning. That doesn’t mean they consistently score 6 runs each game and, of course, they don’t score .66 runs each inning. They might score 2 runs in a game and 14 the next and 5 the next. In fact, in most games they won’t score one run in six of the innings and zero in three innings. Runs tend to come in spurts.

Return averages in investing work similarly. Over the long run the stock market, for instance, has returned around 9% annually. But there’s a lot of volatility that makes up that average. You’re going to have some down months and down years as we've seen that go along with the good months and good years.

Htting singles versus swinging for the fences is a great analogy for this. Babe Ruth hit 714 home runs (3rd best career total). He also led the American League in strikeouts 5 different seasons. So trying to hit home runs comes with the risk of lots of strikeouts and long fly ball outs. That's true in investing also. You can have very concentrated holdings or invest in penny stocks and you could hit a home run; but you could also strike out. By diversifying your holdings and being selective, you’re more like the batter who’s trying to get on base with a single or a walk. You need to diversify among asset classes such as certificates of deposit, bonds, stocks, mutual funds, real estate, etc.

It goes on and on. In baseball you have players with different skills to perform different tasks. Your shortstop needs to be a great defensive player. Your right fielder may not have to be so good defensively as long as he can hit the ball. Your investments should also be segregated into different buckets of money with each bucket designed to perform different tasks. Long term retirement money should be invested differently than money that will be used in two years for a down payment on a house.

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