Get a Good Pitch to Hit

Ted Williams was almost surely the greatest hitter of all-time. He was a two-time MVP, led the league in hitting six times and in home runs four times, and won the Triple Crown twice. A 19-time All-Star, he had a career batting average of .344 with 521 home runs, and was inducted into the Baseball Hall of Fame in 1966.

Williams was also the last player in Major League Baseball to hit over .400 in a single season (.406 in 1941). Ted’s career was twice interrupted by service as a U.S. Marine Corps fighter-bomber pilot.  Had his career not been limited by his military service – especially since it was in his prime – Williams would likely have hit over 700 career home runs and challenged Babe Ruth’s record.

During spring training of his first professional season, Williams met Rogers Hornsby, who had hit over .400 three times and who was a coach for his AA team for the spring. Hornsby emphasized that Ted should always “get a good pitch to hit.”  That concept became Williams’ “first rule of hitting” and the key to his famous and innovative hitting chart (shown below).

The concept is a straightforward one — it’s easier to hit a pitch that’s belt high and right down the middle than one at the knees and “on the black.” Investors should be mindful of this concept too and always seek a “good pitch to hit.”

In part, getting a good pitch to hit mean focusing on approaches and sectors that have the best opportunities for success.  These include momentum investing (see here and here, for example), including highly quantitative (algorithmic) investing based upon momentum (such as managed futures).  Another area for potential outperformance is low beta/low volatility stocks. This surprising finding (since greater return is generally connected with greater risk) has been deemed to be the “greatest anomaly in finance.”  Significantly, this approach works well in the large cap space, where closet indexers predominate.  Moreover, despite rational “copycat risk” fears, there is good research providing reasons to think that this anomaly may well persist. Looking at this opportunity on a risk-adjusted basis only makes it more attractive.

The mid and small cap sectors provide more opportunities despite some liquidity constraints.  International equities tend to provide the best opportunities due to the wide dispersion of returns across sectors, currencies and countries.  Indeed, the SPIVA Scorecard demonstrates that a large percentage of international small-cap funds continue to outperform benchmarks, “suggesting that active management opportunities are still present in this space.”  Moreover, managers running value strategies outperform and do so persistently, in multiple sectors, especially over longer time periods, although lengthy periods of underperformance must be expected and survived.  In the current secular bear market I also encourage the use of portfolio hedging.   

I wish to re-emphasize, however, that success in this arena is extremely hard to achieve and success achieved through good asset allocation can be given back quickly via poor active management. That is why I prefer an approach that mixes active and passive strategies and sets up a variety of quantitative and structural safeguards designed to protect against ongoing mistakes and our inherent irrationality.  I want to be most active in and focus upon those areas where I am most likely to succeed.  I also want to be careful to seek non-correlated asset classes (to the extent possible) in order to try to smooth returns over time and to mitigate drawdown risk. For advisors, surviving in this business can be a major challenge.  Succeeding by actually providing clients with real value is that much more difficult.  It demands the bravery to incur much greater risk – but career and reputation risk rather than investment risk.  For individuals, it requires the bravery to go against the crowd.  Ultimately, investing is a zero sum game.  In other words, all positive alpha is financed by negative alpha. It’s a mathematical certainty.

Value surely exists, but it can be very hard to find. In the equities markets I recommend starting by being very selective — getting a good pitch to hit. I suggest using active investment vehicles within portfolios for momentum strategies, focused (concentrated) investments, in the value and small cap sectors (domestic and international), for low volatility/low beta stocks, and for certain alternative investments.  Passive strategies can be used to fill out the portfolio to provide further diversification.  When you don’t have a good pitch to hit, don’t swing.  When you do, hack away.

6 thoughts on “Get a Good Pitch to Hit

  1. Pingback: 10 Thursday AM Reads | The Big Picture

  2. Is the number of funds who beat the SPIVA scorecard more, less, or the same as would be suggested by random chance? Does overperformance persist fron one period to the nexr? How could you have identified these overperformers before the fact instead of after?

    Dont you think the overperfoming funds are just really good coin flippers?

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