Indian Ticker : Choose Right Stocks that Ticks Money

Secret #6: Know what a fat pitch is and what to do with it

WARREN BUFFETT likes to use examples from sport to outline his investment ideas. He particularly likes to use baseball with references to Ted Williams, the former record holder for the Boston Red Sox. A few years ago Buffett said “We try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.”

When we apply this to investing the message is clear. Wait until everything is in your favour. Nothing makes you buy any particular stock at any particular time. As investors we have the luxury of waiting for the “fat pitch.” But there are problems. To be able to do this effectively we need to master three steps. Before outlining these steps, to keep Buffett’s analogy running, let’s describe what we are trying to do as looking for home-run stocks. These are the stocks with the highest chance of being successful and making you money year after year.

The first step to master is to be able to recognize a home-run stock. As we have seen, they are not glitter stocks that have appeared on the front cover of an investment magazine or recommended by a popular share market commentator.Nor are they stocks that have a trader price pattern of breakouts, double bottoms, or candle-stick trend reversals.

The second is to know what to do when a home-run stock comes along. Buffett has said when everything meets your criteria of it being a great business at a fair price, then buy a “meaningful amount of the stock.” Of cource, this means that you can only hold a small number of companies in your portfolio. The extreme
exponent of only holding a small number of stocks was Phil Fisher. For Fisher, anything over six was too many. The more stocks you hold, the more likely your returns will be average and the more time you will have to spend keeping track of the stocks in your portfolio. You also add considerable risk because you can’t study them properly.

The third step concerns knowledge and confidence. You need the knowledge to know approximately how often a home run stock comes along. You won’t make the investors Hall of Fame if your criteria are set so high that you only get to swing every other decade. On the other hand, if they are set too low then, well,

they are unlikely to give you the outcome that you desire. You also need to have the confidence to wait. Our aspiring Hall of Famer has to resist being suckered in to swinging at pitches that don’t meet the criteria.

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