I can’t help but notice a great number of similarities between people’s approach to their investment portfolios and the way baseball games are played. This is true, even at the T-ball level with four and five year olds, not major leaguers, running around.
Here’s a prime example of this. In T-ball, the children put a soft, rubberized baseball on a stand which looks like a three-foot high golf tee. They line their bat up with the ball and then hit it. At that point, the ball is in play just as in a regular baseball game. That’s when the fun starts.
Typically, the team in the field swarms around the ball. Regardless of which fielding position they were playing before the hit, it becomes a mad scramble for this piece of gold that jumped (or dribbled) off the hitter’s bat. Rarely are outs made, and when they are, it is often because the hitter or one of the runners forgot to run to the next base (or the coach was not paying attention). It’s a thrill for the parents, the kids learn to have fun and get along as a team, and during the course of the season, they learn a bit about the game.
The analogy I see in investing is the way that the kids all run to the ball. Even in the remote possibility that they all get to it quickly, what will happen next? There’s no one to cover the base to throw it to, so no outs will be made. In other words, they are playing for the moment, with no regard for the consequences of their actions, or any forethought as to what will happen next.
They should act this way. They are little kids, not accomplished baseball players. They are not thinking about getting the lead runner out to keep a force play in order, or backing up a throw in case it gets past the player in front of them. It will be years before any of this will matter, and by then many of them will not be playing organized baseball anymore.
Now, think about investors. Like T-ball kids, they also tend to move in packs. They often succumb to doing what all the other “kids” are doing as they perceive safety in numbers. They have a tendency not to think more than one step ahead. Their attention can easily be taken “off the ball” by insignificant, extraneous items, just when it is most important to have some perspective.
Like many aspects of the portfolio management world, what matters most in any decision is making decisions that are consistent with the objective of the particular client. Or, if the decision is being made by the manager of a pooled investment such as a mutual fund, it should depend on what is most consistent with the objective and approach of the fund. In any case, simply dismissing all investments as “good or bad” ones ignores the context which is such a vital part of all investment decision-making.
Related to this, a portfolio should be judged in its entirety, not by pulling out the parts that worked best or failed the greatest. That’s what asset allocation is. And even though we at Sungarden practice a different version of asset allocation than much of our industry, the validity of this mental approach to portfolio management is no different. So,remember this when you are tempted to make an investment decision based on what the crowd is doing: do you want to think like a major leaguer, or like a T-ball player?