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As of late it seems that I'm using sports associations more frequently to conceptualize investing theses. My last article focused on a basketball comparison, while my recently published book "You Don't Have A Money Problem" devotes an entire chapter to a golf analogy. So as a prelude, here comes another. I'm not sure if you're a baseball fan or not, but the "home run derby" is an event where the best long-ball hitters in the game are served up easy pitches to demonstrate their hitting might. Think Hank Aaron of yesteryear or Ken Griffey Jr. around the turn of the century. Well, the stock market has its own "home run derby." Think March of 2009. Now obviously there are many more examples, but four years ago last March should be pretty familiar for everyone. The idea of the "stock market home run derby" is a time when one could essentially "throw a dart behind your back" and pick out a home run investment. Even a passive market investor would have doubled their investment since that time.

Today, I think using the "home run derby" ideology works well. Now obviously if you had been sitting fully invested in 2008 you likely were not able to take great advantage of the numerous "fat pitches" that were coming your way. I don't want to discount the very tangible paper loss for many. But if you happened to have a bit of capital and an eye for fundamental businesses, then 2009 might have in fact been your own personal "home run derby." Where the ideology comes in handy is thinking about the current market. As we sit today - the market doubled in less than half a decade and stocks hitting new all-time highs -- you might be thinking to yourself: "well, I guess I missed that home run showcase, maybe I'll just wait for the next one." The problem, of course, is that unlike baseball's annual home run derby, the "stock market home run derby" doesn't happen every year or even that regularly.

On a strategic basis, I think there are three basic ways of dealing with this fact.

1. Swing for the Fence Regardless

I'd like to indicate that this strategy doesn't make any personal sense to me, but I will agree that some might profess a special insight in this regard. For example, I have previously written that while I think Chipotle (NYSE:CMG) is a fantastic company I have no clue what a reasonable price to pay might be. At the time of that writing, I also indicated that the market was "baking in" a roughly 20%+ earnings growth pace for the next 13 years based on a P/E in the 30-40x range. And while this might very well be reasonable, I claim no special foresight for the next year much less the next decade. If you think CMG can grow faster than the industry for the next 25 years, then perhaps you've found your next home run investment. But for me, I don't fret over "missing" those opportunities if that means I had to go up against the likes of say Randy Johnson instead of the batting practice coach.

2. Use the Charlie Munger "Sit on Your [Hands]" Philosophy

Ok, so Charlie didn't use the "PG version," but the meaning is the same. The second approach to dealing with "less than home run market conditions" is to simply sit on your [hands]; that is, to do nothing. For example Munger describes a personal strategy that he has used in his book "Poor Charlie's Almanack": "In my personal portfolio, I have sat for years at a time with $10 to $12 million in treasuries or municipals, just waiting, waiting…" Now obviously we don't have 8 figures sitting around just waiting for the right home run investment. But that doesn't mean that the philosophy doesn't carry weight. This would be roughly equivalent for you or I to calmly set aside our paychecks from say 2005 to 2009 just waiting to partner with General Electric (NYSE:GE) at $7 a share or Wells Fargo (NYSE:WFC) at $9 a share. Granted, this would require exceptional timing and a strong belief that these wonderful companies would emerge from the recession much stronger than they entered. But even if you doubled those prices and the businesses perform marginally for the next 5-10 years, it still appears that you would be "hitting it out of the ballpark." Now assuredly this is a reasonable strategy; as Warren Buffett would follow: "you do things when opportunities come along." But I don't think Charlie or Warren would ever discourage anyone out of wonderful business partnerships completely. In fact Warren so much as says so:

"Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'expects,' or the ebb and flow of business activity… The risks of being out of the game are huge compared to the risks of being in it."

Source

3. Swing for the Gaps

The third approach effectively links the first two. That is, one cannot possibly be expected to wait for the next "stock market home run derby" to invest, but that doesn't mean that your business partnerships should suffer as a result. You're still looking for wonderful companies at reasonable prices. The only difference -- and correct me if I'm wrong here -- is that instead of hitting homers, you're likely to be hitting a lot of doubles in today's market. Sure you can probably find a "diamond in the rough" or two. But by-and-large wonderful companies don't tend to go on sale that often. Luckily, paying reasonable prices still equates to business results. And for wonderful companies, this means that all is still well.

Let's walk through an example to see what I mean.

In my opinion, one of my better investing decisions last year was partnering with Walgreen (NYSE:WAG) at a cost basis close to $30 a share. In fact, I wrote about that precise process here. Today, I'm up over 60% in less than a year on that investment. But to be perfectly frank, I would have been happier if the price stagnated for the last 11 months as I could have bought more of what I perceived to be a wonderful company at a much lower price. To me, that was my equivalent (at least in 2012) to finding a "home run" price for a great company. Obviously, what happens to the business of Walgreen in the next couple of decades is enormously important to me, a part owner. But it remains that even though the "home run" opportunity has momentarily passed, that doesn't mean that it still can't be a "reasonable" investment. Here's a look at the fastgraphs.com tool to see what I mean:

(click to enlarge)

Sure you could have bought WAG shares at a much lower price in the last couple of years. But even at today's prices, it seems that one would still be well compensated for their time away from capital. Looking down to the fastgraphs.com "estimated return" calculator, one finds a predicted 5-year annual compound rate of 14.5% given a forward year consensus analyst estimate EPS number of $3.27, a 12.5% earnings growth rate, a P/E ratio of 15 and a growing dividend that remains below a 35% payout ratio. Think the 12.5% EPS growth number is too lofty? No problem -- even a 6.6% EPS growth number equates to a 10% estimated annual return:

(click to enlarge)

It should be explicitly stated that this in no way serves as a recommendation. But I think the ideology combined with the pictorial format is particularly useful. It can be easy to see a stock go up 10-20% (or 60% in my case) and instantly write it off as too expensive. And assuredly, much of the "margin of safety" has been eliminated. But personally, 10% annual returns based on effectively marginal business performance is something that might catch my eye.

The same holds true for other companies with the same "triple threat" investment characteristics. That is, a reasonable current dividend coupled with a low payout ratio, a sensible earnings yield and the ability to grow through time via an established economic moat. Companies like Target (NYSE:TGT), Wal-Mart (NYSE:WMT) or even Wells Fargo currently seem to fit that "previously a home run, now a solid double" type of investment bill pretty well.

The point of this article was not to find an exhaustive list of "home run stocks." You might happen upon a few, but I think that's becoming more difficult by the day. The point of the article was not even to find a list of "ground-rule double stocks" either; although I did mention a few. The point was that in baseball, the home run derby -- while fun -- only comes around once a year. In the stock market, it might not even come that often. I suppose literally there is a single "low point" in every year, but figuratively it's rare to find consistent 70 mile an hour pitches in your wheelhouse. So for the majority of your time, you aren't deciding whether or not to participate in the stock market home run derby, but more aptly you are deciding whether or not to play the regular game or go sit on the bench. And we all know that playing is more fun than sitting on the bench. Luckily, the choice usually isn't between making money and losing money. It's simply the difference between making money or making a lot of money. So here's to a lot of doubles, a homer from time to time and the rarity of the business strikeout.

Source: Waiting For The Stock Market Home Run Derby