By Cam Goodwin for the Nashville Business Journal | July 27, 2015
For baseball fans, nothing is more thrilling than watching the arc of the ball as it makes its way up, up, and finally disappearing beyond the outfield fence. It’s a great moment, but in essence, that’s all it is — a single exciting moment in what is ultimately a long game.
For the purpose of this investment column, we’re going to look at the hitting stats of two very successful major league players: Ty Cobb and Barry Bonds. Both exceptional in their own right, but on paper, their hitting”investments” tell two different stories in terms of ROI.
Barry Bonds played baseball for 22 years. He hit 762 homeruns for an average of 35 per season, and he struck out 1539 times for an average of 70 per season. Bonds had 2,935 hits for an average of 133 per season. His batting average was .298.
Ty Cobb played for 24 years. He hit a total 117 home runs for an average of 5 per season, and he struck out 681 times for an average of 28 per season. Cobb had 4,189 hits for an average of 133 per season. His batting average was .366.
While Bonds may have provided more of a thrill at the park, he did not produce the consistent results that Cobb served-up. Ty struck out 60% less of the time and hit 30% more of the time. Smart investors will learn from this stat by applying a strategy that gets them on base with consistency. Investors looking to build a long career in the market understand that the allure of the home run ball is more often than not a dangerous swing to take.
Consider Bonds and Cobb as investment managers.
Over a two year period, Bonds posted a 50% ROH (return on hits) in year one. In year two, his ROH was -26% for a simple average return of 12%. Cobb’s ROH in year one was 20% and in year two it was 2% for a simple average return of 11%. On the surface, it looks as though Bonds came out on top. But had you given each investment manager $100,000 of your money, after these two years, you would have wound up with $111,000 with Bonds, and $122,000 with Cobb.
The point is that good investment strategy does not bank on any one asset allocation, just as a baseball team needs nine players to take the field. Solid Investment strategy, muck like baseball is built around informed analysis and diversification. Just ask Billy Beane.
So the next time that you step into the batter’s box, think about your financial future in terms of base hits, not home runs. If you are smart, you’ll be batting clean-up around the time you retire.