Baseball, Investing Prove a ‘Natural’ Fit (Michael W. Britt Commentary)

Imagine Roy Hobbs from the baseball movie, “The Natural,” bleeding business commentary in and out a broadcast from this year’s Subway Series …

“Good evening, baseball fans, this is Roy Hobbs. It is a beautiful October night in New York. October brings two things to mind — playoff baseball and stock market declines. As an ex-player, manager, and current baseball broadcaster, I have attended many baseball games, watched all the baseball movies and read a few baseball books. The phrase ‘baseball is like life’ was always mentioned, and I accepted it as fact. Now, I disagree.

“Baseball is different from life because baseball is played by rules that are fair. For example, if a fielder boots a ground ball, the pitcher is not charged with a hit — the fielder is given an error. Then if playing baseball is not like life, then is it like investing?

“Not really, but running a baseball team may be like managing an investment portfolio.

“Confused? Consider two analogies.

“First, Reggie “Mr. October” Jackson hit 563 home runs, sixth best of all time. Having a team of Reggies, you would expect to win, right? Think again. Along with his home runs, Jackson has the most strikeouts of any baseball player ever, with 2,597. If you had a team of Reggies, you would probably win big or lose big.

“A team of Reggies is like having a non-diversified portfolio of aggressive stocks. The portfolio could take off like a rocket or crash and burn. Or maybe do both.

“Second analogy: Pete Rose is the career leader in hits, with 4,256; but he only had 160 home runs. A team of Petes would be steady run scorers but would lack home-run punch. Now trust me, sports fans, a manager really wants the long-ball when the opposing pitcher is throwing batting practice. An investment portfolio of Pete’s would probably give good returns but wouldn’t fully participate in the really good years.

“So which is better, a Pete portfolio or a Reggie portfolio? The answer is both.

“Here is where the parallel between a baseball team and portfolio management is really evident. You must have a well-balanced lineup to be successful. Petes are needed to get on base, and a few Reggies are needed to knock them in. But don’t forget about defense. When you are facing a tough opposing pitcher (read: tough economy or investing environment), Reggie may not be as useful as a solid fielder.

“So you may sacrifice some offense for a solid glove in the field. Defensive specialists won’t give you a lot of hits or home runs, but they can keep you in the game with their fielding.

“Now, what about the pitching staff? I agree with Joe Torre that pitching wins championships. Pitchers are your core holdings that anchor the team (portfolio). You must have solid pitching or you won’t even be in the game.

“If your team is in a pitchers’ duel, your star pitcher should be up to the task. In a bear market, your core holdings should be pillars of strength; stocks you can count on when the storm has passed. Your ace may give up a three-run homer now and then, but over the long haul, he needs to be a Hall-of-famer.

“As the manager of the team, you have to know your players and have reasonable expectations. You should not expect your defensive specialist to hit 50 homers every year. That is not why he is in the lineup. He may have a good year offensively now and then, but not like Pete or Reggie.

The manager also has to know when to make substitutions. A solid lineup may not change all year, but if someone gets hurt permanently or the farm system produces a new star, changes have to be made.

“What can the average investor take away from this baseball gibberish? As the manager, you need a well-balanced lineup, a solid pitching staff, long-term contracts with your star players, and you have to know the limits and capabilities of your players.

“Be ready for an occasional slump, because they will come. But with a solid team, you will win more than you lose, and, if Pete and Reggie have a great year, you may even win the World Series.

“Play Ball!”

(Michael W. Britt, CFA, is a portfolio manager for Greenwood & Associates in Fayetteville. He may be reached via email at [email protected].)