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Seth Klarman: Investors Are Like Relief Pitchers

A common theme

Many investors will no doubt be familiar with Warren Buffett (Trades, Portfolio)'s advice to "wait for the right pitch." The Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) chief likes to cite baseball legend Ted Williams' book, "The Science of Hitting," in which the Red Sox left fielder (who was the last Major League Baseball player to have a .400 season) described the secret to his success - he only swung at pitches that came into his statistical sweet spot. Buffett has applied this logic to investing by only investing in things that lie within his own "sweet spot," or his "circle of competence."


Many are probably also familiar with the book "Moneyball," which focuses on the Oakland Athletics 2002 season, during which the underdog team became the first to embrace modern sabermetrics in its scouting and roster-building, effectively applying value investing principles to baseball - they found cheap, undervalued players that had been overlooked by other teams.

For whatever reason, drawing analogies between baseball and investing remains popular. In his 2018 letter to investors of his Baupost Group, Seth Klarman (Trades, Portfolio) compared investors to relief pitchers.

Be like a reliever

In baseball, a relief pitcher is a player who comes in to replace a starting pitcher. Pitching is a tiring business, and so relievers provide their team a fresh arm going into the crucial final innings. However, relief pitchers face immense psychological pressure as they are often the ones tasked with winning close games. Give up the winning run, and your teams and fans may not forgive you. The best relief pitchers are able to shoulder this pressure and shrug off the losses without letting it affect them. Klarman believes that investors should adopt a similar philosophy:


"A reliever has much in common with an investor. When you make an investment and the price drops, the key is to see the fall in price as not necessarily indicative of a past error or failure (no one, after all, can predict the daily meanderings of the markets), but as an opportunity. It is a fresh chance to make another good investment, potentially an even better one now that those shares are lower in price...The only way to invest, after what you purchased has fallen in price, is to be that successful relief pitcher. Put yesterday's outcome out of your mind, get back on the mound, and make the best decision you can today with all the information at hand".



Klarman's point is that good investors - like good relief pitchers - don't let themselves be rattled by setbacks. Failure is inevitable in any walk of life, but it is especially common in the financial markets, where even the best investors and traders can only hope to have slightly better than average odds. The good thing is that every day is a new opportunity, so past failures have little bearing on your future success.

Disclosure: The author owns no stocks mentioned.

Read more here:

  • Seth Klarman: How to Balance Risk and Reward
  • Charlie Munger: Berkshire Hathaway's Biggest Mistakes
  • Seth Klarman: How to Buy and Sell Stocks



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This article first appeared on GuruFocus.