-Warren Buffett
Personally, I don't like baseball at all, I think it is boring. However, this doesn't take away from the fact that baseball has some of the greatest analogies out of all sports. I was reading Malcolm Gladwell's book Blink and I ran into Ted Williams again. The first occurrence was the 2001 Berkshire Annual when Sir Buffett stated:
"[At times when prices are high for both business and stocks], we try to exert a Ted Williams kind of discipling. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his 'best' cell, he knew, would allow him to bat .400; reaching for balls in his worst' spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; singing indiscriminately would mean a ticket to the minors."
Now, I think the main point is pretty obvious, but there are always players that know where the best zones to hit are, yet always reach to swing outside the zone. That is true with every aspect of life. There will always be this minority (majority in Wall Street) who always go for the reach only to be disappointed over and over again. Swinging in the "best" cell is value investing, and swinging in the "worst" cell is every other type of investing. Now I would presume there are very few "best" cells and many "worst" cells, but that's just the result of probability.
In Blink, a book filled with numerous studies to prove that your first glance is sometimes the most powerful and important piece of information. The paragraph mentioning Ted Williams states:
"Williams was perhaps the greatest hitter of all time, a man revered for his knowledge and insight into the art of hitting. One thing he always said was that he could look the ball onto the bat, that he could track it right to the point where he made contact. But Braden (world's top tennis coach) knew from his work in tennis that that is impossible. In the final five feet of a tennis ball's flight toward a player, the ball is far too close and moving much too fast to be seen. The player, at that moment, is effectively blind. The same is true with baseball. No one can look a ball onto the bat. 'I met with Ted Williams once,' Braden says. 'We both worked for Sears and were both appearing at the same even. I said. 'Gee, Ted. We just did a study that showed that human beings can't track the ball onto the bat. It's a three-millisecond event.' Ad he was honest. HE said, 'Well, I guess it just seemed like I could do that."
And that makes perfect sense, some people have the talent to do anything so swiftly and effortless that the explanation pales in comparison to the event. Ted Williams had the talent, Warren Buffett has it. And if you read Sir Buffett's explanation of a buy or sell, it seems too natural. For example, screaming buys would be considered a once in a 10 year even, in my opinion. That doesn't mean there aren't 10 year intervals between specific opportunities, Japan is a good example of that. While the U.S stock market went higher for the better part of the 90's, Jappan's market went lower and lower, or what a head of a securities desk would call: "Inversely Correlated."
When, Sir Buffett makes a purchase such as Posco, Tesco, or Petro China in times when he can't find anything attractive in the U.S., the explanation is useless. The process is Sir Buffett swinging at Fat Pitches, scanning the universe of opportunities and looking for screaming buys. That is why, Malcolm Gladwell goes on to say in the paragraph after Ted Williams:
"We have, as human beings, a storytelling problem. We're a bit too quick to come up with explanations for things we don't really have an explanation for. "
That is why sometimes, when a purchase is made, the explanations of a decisions is worthless. The person making the decision is almost programmed to hit in the "best" cells or swing at the "fat pitch" and we find the explanation to be entertaining because we can't fathom being so disciplined to not swing in the "worst" cells or to invest in something outside of our circle of competence.
Consequently, mistakes are made outside the strike zone, Sir Buffett goes on to say:
"If they are in the strike zone at all, the business 'pitches' we now see are just catching the lower outside corner. If we swing, we will be locked into low returns. But if we let all of today's balls go by, there can be no assurance that the next ones we see will be more to our liking. Perhaps the attractive pries of the past were the aberrations, not the full pries of today. Unlike, Ted, we can't be called out if resist three pitches that are barely in the strike zone; nevertheless, just standing there, day after day, with my bat on my shoulder is not my idea of fun."
The beauty of it all is I think the last sentence is his idea of fun. You could almost picture the now 77 year old (happy birthday!) standing near the batters box waiting for a watermelon-like pitch to hit out of the ball park. He doesn't swing even if they are in the strike zone, to take the 77 cells image a little further, lets examine it with a little design that I made:
Red: 32 (41.6%) Worst Cells
Orange: 24 ( 31.2%) Bad Cells
Yellow: 12 ( 15.5%) Decent Cells
Light Green: 8 ( 10.4%) Good Cells
Green: 1 ( 1.3%) Best Cell(s)
Now, these 77 cells are really open to interpretation and for others there may be more "Green" cells, but it really doesn't make a difference. The point is don't swing in the worst cells or the bad cells, the decent cells will give you 'decent" returns and the good and best cells will give you "good" and some of the "best" returns. Very simple in theory, very tough to implement! Personally, I think that Sir Buffett only swings in the Green, rarely in the light green, and more rarely in the yellow. I would place the Mid American utility purchase in the yellow, even he stated that returns will be decent.
In the future, I will reference this image often to point out whether I swing or not.
Moving on...
I wanted to also focus on what makes the price of businesses in the marketplace go upward because I believe the consensus is misinformed. Earnings do play an important role, but the most important is risk premiums. In fact, earnings and the stock market have very little to do with each other, they are more of a coincidence then a source of useful information to make a decision on. I would say much of the blabber of how earnings are rising so the stock market is cheap or vice versa is part of the "human being story telling problem." When the market falls and the earnings are high, the consensus doesn't have an explanation.
The explanation has more to do with risk premiums than earnings. Low and expanding risk premiums cause damage to the markets, because when the consensus has a high risk appetite, they will buy anything earnings or not. This is more psychological and is less quantifiable, but more sensible. The talk now that there is a repricing of risk is true because the consensus is changing from a period of high risk appetite to low risk appetite. Obviously this is a top-down view, but it is essential to understand why some businesses are selling at a lower price. Moreover, this repricing takes time!
That's it for today, tomorrow is a holiday and hopefully after packing up for my trip I can put together another post. On Tuesday I live to Hartford for three weeks, based on the little amount of free time, I can't guarantee a post, but I will try my hardest. Now that we have an idea of a strike zone with a visual, it makes sense to look at it more in depth in the future. To make the process look intellectually challenging, we will call it "Cell Theory"; who said investing isn't fun?
Until next time,
S.K.
"[At times when prices are high for both business and stocks], we try to exert a Ted Williams kind of discipling. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his 'best' cell, he knew, would allow him to bat .400; reaching for balls in his worst' spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; singing indiscriminately would mean a ticket to the minors."
Now, I think the main point is pretty obvious, but there are always players that know where the best zones to hit are, yet always reach to swing outside the zone. That is true with every aspect of life. There will always be this minority (majority in Wall Street) who always go for the reach only to be disappointed over and over again. Swinging in the "best" cell is value investing, and swinging in the "worst" cell is every other type of investing. Now I would presume there are very few "best" cells and many "worst" cells, but that's just the result of probability.
In Blink, a book filled with numerous studies to prove that your first glance is sometimes the most powerful and important piece of information. The paragraph mentioning Ted Williams states:
"Williams was perhaps the greatest hitter of all time, a man revered for his knowledge and insight into the art of hitting. One thing he always said was that he could look the ball onto the bat, that he could track it right to the point where he made contact. But Braden (world's top tennis coach) knew from his work in tennis that that is impossible. In the final five feet of a tennis ball's flight toward a player, the ball is far too close and moving much too fast to be seen. The player, at that moment, is effectively blind. The same is true with baseball. No one can look a ball onto the bat. 'I met with Ted Williams once,' Braden says. 'We both worked for Sears and were both appearing at the same even. I said. 'Gee, Ted. We just did a study that showed that human beings can't track the ball onto the bat. It's a three-millisecond event.' Ad he was honest. HE said, 'Well, I guess it just seemed like I could do that."
And that makes perfect sense, some people have the talent to do anything so swiftly and effortless that the explanation pales in comparison to the event. Ted Williams had the talent, Warren Buffett has it. And if you read Sir Buffett's explanation of a buy or sell, it seems too natural. For example, screaming buys would be considered a once in a 10 year even, in my opinion. That doesn't mean there aren't 10 year intervals between specific opportunities, Japan is a good example of that. While the U.S stock market went higher for the better part of the 90's, Jappan's market went lower and lower, or what a head of a securities desk would call: "Inversely Correlated."
When, Sir Buffett makes a purchase such as Posco, Tesco, or Petro China in times when he can't find anything attractive in the U.S., the explanation is useless. The process is Sir Buffett swinging at Fat Pitches, scanning the universe of opportunities and looking for screaming buys. That is why, Malcolm Gladwell goes on to say in the paragraph after Ted Williams:
"We have, as human beings, a storytelling problem. We're a bit too quick to come up with explanations for things we don't really have an explanation for. "
That is why sometimes, when a purchase is made, the explanations of a decisions is worthless. The person making the decision is almost programmed to hit in the "best" cells or swing at the "fat pitch" and we find the explanation to be entertaining because we can't fathom being so disciplined to not swing in the "worst" cells or to invest in something outside of our circle of competence.
Consequently, mistakes are made outside the strike zone, Sir Buffett goes on to say:
"If they are in the strike zone at all, the business 'pitches' we now see are just catching the lower outside corner. If we swing, we will be locked into low returns. But if we let all of today's balls go by, there can be no assurance that the next ones we see will be more to our liking. Perhaps the attractive pries of the past were the aberrations, not the full pries of today. Unlike, Ted, we can't be called out if resist three pitches that are barely in the strike zone; nevertheless, just standing there, day after day, with my bat on my shoulder is not my idea of fun."
The beauty of it all is I think the last sentence is his idea of fun. You could almost picture the now 77 year old (happy birthday!) standing near the batters box waiting for a watermelon-like pitch to hit out of the ball park. He doesn't swing even if they are in the strike zone, to take the 77 cells image a little further, lets examine it with a little design that I made:
Red: 32 (41.6%) Worst CellsOrange: 24 ( 31.2%) Bad Cells
Yellow: 12 ( 15.5%) Decent Cells
Light Green: 8 ( 10.4%) Good Cells
Green: 1 ( 1.3%) Best Cell(s)
Now, these 77 cells are really open to interpretation and for others there may be more "Green" cells, but it really doesn't make a difference. The point is don't swing in the worst cells or the bad cells, the decent cells will give you 'decent" returns and the good and best cells will give you "good" and some of the "best" returns. Very simple in theory, very tough to implement! Personally, I think that Sir Buffett only swings in the Green, rarely in the light green, and more rarely in the yellow. I would place the Mid American utility purchase in the yellow, even he stated that returns will be decent.
In the future, I will reference this image often to point out whether I swing or not.
Moving on...
I wanted to also focus on what makes the price of businesses in the marketplace go upward because I believe the consensus is misinformed. Earnings do play an important role, but the most important is risk premiums. In fact, earnings and the stock market have very little to do with each other, they are more of a coincidence then a source of useful information to make a decision on. I would say much of the blabber of how earnings are rising so the stock market is cheap or vice versa is part of the "human being story telling problem." When the market falls and the earnings are high, the consensus doesn't have an explanation.
The explanation has more to do with risk premiums than earnings. Low and expanding risk premiums cause damage to the markets, because when the consensus has a high risk appetite, they will buy anything earnings or not. This is more psychological and is less quantifiable, but more sensible. The talk now that there is a repricing of risk is true because the consensus is changing from a period of high risk appetite to low risk appetite. Obviously this is a top-down view, but it is essential to understand why some businesses are selling at a lower price. Moreover, this repricing takes time!
That's it for today, tomorrow is a holiday and hopefully after packing up for my trip I can put together another post. On Tuesday I live to Hartford for three weeks, based on the little amount of free time, I can't guarantee a post, but I will try my hardest. Now that we have an idea of a strike zone with a visual, it makes sense to look at it more in depth in the future. To make the process look intellectually challenging, we will call it "Cell Theory"; who said investing isn't fun?
Until next time,
S.K.
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