U.S. Markets close in 1 hr 9 mins

Warren Buffett on Baseball and Stock Picking

Warren Buffett on Baseball and Stock Picking

Warren Buffett (Trades, Portfolio) is a living legend in the investing world. The consummate value investor, he has built Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) in his image.

Known for his dry humor and penchant for aphorisms, Buffett has become required reading for generations of investors. But the stock market is not the Oracle of Omaha's only love. Indeed, he has long been an avid baseball fan. These passions have merged on more than one occasion. As a result, we have access to some of the best investment advice in the world, filtered through the lens of America's favorite pastime.

Wait for the right pitch

In 2018, HBO released a documentary on Buffett's life and career. In an interview for the program, he explained why making a successful investment requires the same sort of disciplined patience displayed by the best baseball sluggers:

"Ted Williams described in his book 'The Science of Hitting' that the most important thing -- for a hitter -- is to wait for the right pitch. And that's exactly the philosophy I have about investing -- wait for the right pitch, and wait for the right deal. And it will come... It's the key to investing...If he waited for the pitch that was really in his sweet spot, he would bat .400. If he had to swing at something on the lower corner, he would probably bat .235. The trick in investing is to watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, 'Swing, you bum!,' ignore them...Defining what your game is -- where you're going to have an edge -- is enormously important."

A great batter has the wisdom to know what sort of pitches he can hit, and the patience to wait for the right pitch to be thrown. Swinging at everything is a recipe for striking out, and for a poor batting average. In the same fashion, buying every security or business opportunity that comes one's way is a recipe for underperformance. Waiting for the right opportunities is what pays off, both in terms of quality of investments and investing batting average.

Stick to the game you're good at playing

In a May 1 interview with Yahoo Finance, Buffett was asked whether he regretted missing out on the big gains enjoyed by tech stocks, such as Microsoft (NASDAQ:MSFT). He explained that he never regrets failing to buy companies he does not understand:

"There's a lot of games I miss. I would have missed Microsoft even if I had gotten to know Bill [Gates] earlier or something. Those just aren't my games. I don't worry about the things I miss that are outside my circle of competence of evaluating. I have missed things that were within my circle, and that's a terrible mistake. Those are my biggest mistakes. You haven't seen them. But it's not a mistake because I miss Netscape or something like that."

An all-star baseball player is probably going to be a poor basketball player, and vice versa. They are radically different games that demand very different skill-sets, both in terms of physical talent and strategic insight. In the same fashion, investors must understand their own knowledge sets -- what Buffett calls circles of competence -- and never deviate from them. The guru avoids businesses he does not understand, even if they seem attractive on the surface. Lasting success comes from doing what you are good at. For baseball players, that means playing baseball. For value investors, it means sticking to value stocks.

Never swing before the pitch is thrown

Published in 2006, "The Tao of Warren Buffett," which was written by Mary Buffett and David Clark, features many valuable nuggets of wisdom. As is often the case with Buffett, much of that wisdom is filtered through the lens of baseball:

"I've never swung at a ball while it's still in the pitcher's glove."

While brief, this quotation is full of meaning. A batter would be incredibly foolish to swing before a pitch is even thrown. With nothing to swing at, it is a guaranteed strike. For Buffett, companies that have no established track record are like balls still in the pitcher's glove. They have no proven value. Consequently, an investment is nothing but speculation, which often amounts to swinging at nothing but air. Buffett likes companies that have been tried and tested. Value is tangible. A story stock is just empty air until proven otherwise.

Avoid the money manager's trap

Another passage in "The Tao of Warren Buffett" discusses the challenges money managers face. According to Buffett, professional asset managers often feel a dangerous pressure to swing at junk:

"The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"

This is an important lesson. While Buffett can ignore the voices telling him to swing, many asset managers cannot afford to do so. As a result, they often make suboptimal decisions. Patience is not rewarded, since clients or limited partners want to see results right away. Sitting back while pitches are flying wildly by is often not an option. As a consequence, the "pros" often find themselves striking out.

Disclosure: No positions.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.