I was recently sitting at my 10-year old son’s Little League playoff game. It was the last inning—bottom of the 6th —and we were up 5 to 2 with two outs and a full count on the batter. Our pitcher threw a curveball that coasted across the back corner of the plate—a called third strike. We, the League underdogs, just beat the team with the strongest hitters, the team with kids that were double the size of just about every player on our team and the team that hit the most home runs during the regular season.
As I waited for my son to emerge from the dugout, I thought about how these boys were able to accomplish this tremendous feat and I realized that baseball and investing are very similar. (For related reading, see: 6 Questions to Ask a Financial Advisor.)
Keys to On- and Off-the-Field Success
Patience, consistency and discipline. Baseball is a long, slow game. More time is spent patiently waiting for something to happen than actually playing. Often, the winner or loser is determined by a few key decision-making moments. The players prepare, practice and remain disciplined so they are ready to take advantage of an opportunity when it comes along. The key for the boys was not hitting home runs, it was the ability to get on base, either with a single or double or even a walk. These boys understood that when you had runners, you scored runs. So they stayed disciplined and waited for the right pitch. It wasn’t exciting, but it worked.
The same is true of investing—patience is key. Investors can go long periods of time with virtually flat or nominal returns. You feel like you should do something about it, but if you stick to your plan and stay invested, you will have a higher likelihood of achieving superior returns over the long-term. And just as baseball games often come down to a few big plays, so does investing. You don’t know when those big plays are going to happen or when the market is going to go up, but just like you have to play the whole long game in order to get the W, you must invest and you must stay invested. Sitting on the sidelines is not an option. (For related reading, see: The Financial Markets: When Fear and Greed Take Over.)
Do You Really Need the Slugger?
My son’s team was successful because although they had no superstars, they had consistent players who could be counted on, both on the field and at the plate and they had a deep bench. When one player had a bad day, another player was ready to step in.
In investing, you don’t need to pick the top performing stock to achieve superior returns and the odds of you doing so successfully are not very good. So rather than try that, successful investors own a portfolio of solid, diversified companies that contribute to the overall profile of a portfolio. Sure, some do better than others at different points in time, but it isn’t about the individual holdings, it is about the performance of the portfolio as a whole, just like it is about the performance of the team, not any individual player.
Teams win baseball games and investors reach their financial goals because they do the little things right. So when it comes to your investments, play the game, control what you can—costs, asset allocation, risk and taxes—and remember that compounding smaller predictable returns will have a greater long-term impact on your ability to reach your financial goals than owning the top performing stock. And maybe you too will be a winner, just like my son’s Little League team. (For related reading, see: Behavioral Finance: How Bias Can Hurt Investing.)