I came across this quote from Li Lu of LL Investment Partners on page 49 of the Charlie Munger book Poor Charlie's Almanack that discussed adopting a Ted Williams mindset towards disciplined investing. This is one of the best baseball analogies on investing that I have ever come across, and I wanted to share it with my Seeking Alpha friends:
In making investments, I have always believed that you must act with discipline whenever you see something you truly like. To explain this philosophy, Buffett/Munger like to use a baseball analogy that I find particularly illuminating. Ted Williams is the only player who had a .400 single-season hitting record in the last seven decades. In the Science of Hitting, he explained his technique. He divided the strike zone into seventy-seven cells, each representing the size of a baseball. He would insist on swinging only at balls in his 'best' cells, even at the risk of striking out, because reaching for the 'worst' spots would seriously reduce his chances of success. As a securities investor, you can watch all sorts of business propositions in the form of security prices thrown at you all the time. For the most part, you don't have to do a thing other than be amused. Once in a while, you will find a 'fat pitch' that is slow, straight, and right in the middle of your sweet spot. Then you swing hard. One common problem for investors is that they tend to swing too often.
I love that quote, particularly because it cleanly applies to two areas of my investing life. The first one is Williams' refusal to swing at pitches in his worst cells. If I gave in and bought Apple (AAPL), that would be my equivalent of swinging at my worst cells. The only technology company that I can see myself holding for twenty years would be IBM (IBM), and that is because it is more of a technology services company than the other tech firms (and therefore more predictable, in my opinion).
Sure, I see the circus surrounding Apple as much as anyone else - I mean, it increased profits by a crazy number like 94% recently - and it seems to be breaking one number after another. But the fact of the matter is that I can predict where Pepsi (PEP), Johnson & Johnson (JNJ), and Kimberly-Clark (KMB) will be in 2020 with much better confidence than I can Apple, so that encourages me to stick to my "best cells" in Williams' terminology.
The other part of the quote that I found particularly applicable to my portfolio strategy application is the "act with discipline whenever you see something you truly like." I'm excited about Coca-Cola's (KO) long-term prospects, and I suspect the recent 2-for-1 stock split will generate some buzz for the stock. Likewise, I'd love to get some shares of Colgate-Palmolive (CL). But if I were to buy either firm today, I would not be making a purchase at a disciplined price.
This isn't necessarily the end of the world - plenty of people might be satisfied to own an income stream that starts at 2.75% of investment and will probably increase at 7-10% annually indefinitely, but still - if I want to put myself in a position to generate tremendous upside, then I need to be patient and wait for that fat pitch to come.
The fun thing about investing is that in almost any environment, there is almost always something intelligent to do. Becton Dickinson (BDX) is now trading at below 14x earnings, and it has a strong chance of producing double digit dividend growth over the medium term. While Wal-Mart (WMT) is starting to deal with a public relations and legal headache, the stock now offers a dividend yield of 2.75% for a firm that has raised its dividend by 18% annually over the past ten years and still pays out less than half its earnings as dividends.
The ghost of the Ben Graham question, "On what terms? And at what price?" emerges once again. Identifying the right company is only half the battle - the harder part is resisting our favorite companies to buy those we can get on much better terms.