Friday, December 19, 2014

How Baseball Relates to The Stock Market

"Take me out to the ball game...Just buy me some peanuts (Kraft-KRFT) and Cracker Jack (PepsiCo-PEP)...

Believe it or not, the game of baseball and trading/investing in stocks have many similarities.  I'm a baseball fan.  My favorite team is the Oakland Athletics.  Growing up in San Jose, CA, I could've been a Giants fan.  But the Bash Brothers (Canseco and McGwire) were too exciting to miss on television.  Best part of watching baseball, is watching baseball with your father.  My dad and I saw many games together sitting in the living room of the duplex he and mom rented.  We even went to the Coliseum a few times.  I looked forward to eating my "dollar hot-dog" from the nosebleed sections; the only tickets we could afford to buy were in the rows with the birds and the broke.  The experience was ultimately the only thing that mattered.  I miss those days...

I have taken to comparing the duel between pitcher and batter with known investing elements when buying and selling a stock.  Are you ready to play ball?  You shall soon see.

Batter: You
Pitching: The Market
Stock Market Investing
1. Walk to the plate 2. Stand ready & wait for the pitch 3. The pitch 4. The swing 5. Hear if contact is made 6. See if the ball is in play 7. Decide to run 8. Make it safely to a base on the field  
Doesn’t care if you’re Ted Williams on steroids with bionic eyes and limbs and the patience of a Zen master.
Use both fundamental & technical analysis to value a company’s stock = your bat, bat speed, eyesight, experience, etc.  The price of the stock, readily available to you = the pitch.
1) Walk to the plate

Tries to deter you by showing off its super human pitching speed, accuracy, control, and other undefined pitches (Bugs Bunny curve balls resembling electron motion at times).  Beyond intimidating!
Attempt to determine your risk.  Gather as much information as possible about the company that is also available to The Market.  Come up with a unique investment thesis.  Have predefined exit criteria.
2. Stand ready & wait for the pitch
Has limitless time to keep you on the plate, standing in vain.  Doesn’t care.  Knows you’ll either leave the plate or worse, get impatient.
Your Watch-list.  Monitor it daily.  Your liquidity.  Always have cash on hand.  Your limit orders.  Use them!

3.  The pitch
Messes with your mind and emotions.  Makes you believe you see the ball coming.  Makes you believe you’ve gauged the trajectory correctly.  Makes you believe you have a strong sense of timing from release of the ball to your bat’s reach. 
Understanding investor psychology.  Keeping your emotions and ego in check.  Not being overconfident about your intrinsic value calculations.  Adjust for inflation and both systemic and non-systemic risk.  List these!
4. The swing
Makes you doubt yourself, sometimes right away.  Too high, too low, not enough strength, etc.  Confuses your swing with those of thousands of others.  Makes you grip the bat tightly.  Makes you uncertain of where your hands should be on the bat.
Wait for YOUR pitch = your price.  Don’t buy when the mob is buying, better yet, buy before everyone else does if your conviction is high.  Know something about the price/pitch that others do not.  Think outside the box.  If the price looks good, buy.  If it drops right away, buy more.  Who’s the dope?  You or the pitcher?  Know this!
5.  Hear if contact is made
Has the crowd scream louder than people at Arrowhead stadium.  Makes you think you’re hard of hearing even when your hearing is perfect.  Makes both copycat and false noises to throw you off.
Read earnings reports, company statements, forensic accounting statements, and value these over media comments, articles online, guru comments, etc.  Use metrics that matter most for the company in question, ROE, ROIC, Cash from Operations, Earnings, etc.

6. See if the ball is in play
Will define “play” for you as being between the foul lines, but nothing else.  Won’t tell you if it’s a pop-up, line drive to a fielder, ground ball heading out of the infield, etc. 
Realize if you’re averaging down makes sense or if you’re trying to catch a “falling knife.”  Realize if the stock’s appreciation momentum is not as a result of the last buyers coming in versus new buyers re-discovering the hidden value in the stock. 
7.  Decide to run
Tolerates you leaving home plate but will remove the chalk demarcating the lane to first base in reprisal.  Will make you feel as if you are running toward first base in a wind tunnel with a jet turbine on the other end blowing you back.
Don’t capitulate unless something fundamental has changed, your thesis no longer is valid, or your financial situation has changed, making you a forced seller.  If you’ve reached your pre-determined sell price, decide if doing it all at once, or in blocks makes better sense in relation to what you believe the stock will fetch in price in the following days.
8.  Make it safely to a base on the field
Will limit you to a single, double, triple, or home run.  It will statistically favor you getting a single i.e. to first base only.
You can make money but it doesn’t mean you will beat the indexes.  You may have some winners but you will most likely also have losers.  Diversify!  Limit your losses.  Take gains and don’t be greedy.  Allocate appropriately.  Limit your trading costs.  Better yet, get low-fee/passive index ETFs or mutual funds and leave the “game” to others.

There is actually more science involved in baseball than there is in investing in the stock market!  Being at bat is a very lonely place, but so is being at your computer about to make a trade.  The only way you're ever going to make a great investor is by putting in the work!  Read, read, read!  If you strike out, don't quit.  Learn from your mistakes and get back up to the plate.

Thanks for reading!  I will be on vacation next week, enjoying some much needed time off and spending quality time with my family.  Look for me to be back the week of the 29th.  Happy Holidays!

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