A New Season Begins

For local sports fans still heartbroken after last week’s 49ers letdown, there is good news to redirect our collective attention: pitchers and catchers for the San Francisco Giants reported for spring training yesterday, Feb 15th. For die-hard fans, this officially marks the beginning of the new season and allows us to look forward with positive energy.

One of the great things about the start of a new season is the sense of time that it brings. When you know there are 162 games that stretch through September, you learn to not stress over the results of any particular game. Similarly, as long-term investors, we keep short-term data in perspective even when markets hit a bumpy patch – as they have this week with an uptick in inflation leading to concerns the Fed won’t lower rates until later than expected, and stocks moving lower in the short-term.

“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch.” – Warren Buffett 

The average baseball game lasts about two and a half hours – which is actually an improvement following the implementation of the pitch clock last year. During that 9-inning contest, a Wall Street Journal study found that there were approximately 18 minutes of action.[1] This means that 88% of the time, players are effectively waiting for the next moment of action. On its face, it seems odd to have highly trained, world-class athletes spend so much time standing around. However, it provides a good metaphor for long-term investors. 

Like baseball, success in investing is rarely determined by constant transactions and tinkering. In fact, frequent trading can work against investors. It can lead to higher transaction costs, increased taxes, and weaker performance. A long-term perspective and a consistent decision process are far more likely to result in success, much like baseball players patiently waiting for a pitch that’s right in their sweet spot.  

We can see this same phenomenon play out in market data. Since 2019, more than 70% of total trading days have seen the S&P 500 end with a daily change between -1% and +1%.[2] On most days, the market is meandering with small changes, as investors wait for the next moment of big news and larger price action. This typically occurs as the result of a Fed announcement, economic data release, or corporate earnings that cause markets to react, after which they shift back into waiting mode. This ebb and flow, much like a baseball game, means that patience and consistency are key because you don’t know exactly when momentum will shift. 

Home runs are exciting and help sell tickets, but good defense and strong pitching are often what carry teams deep into the postseason. It’s tempting to try to win by hitting home runs. However, when building your portfolio and saving for retirement, hitting singles and doubles is the safer, lower-risk route. It’s the singles and doubles that win the game. Focusing on the basics, including proper asset allocation, regular rebalancing, keeping expenses low, and thoughtful tax management have been proven to provide better returns over time – and, more importantly, these are actions that are within our control through the portfolio construction and financial planning process. 

Another area that is within the control of a baseball manager is setting the lineup. You want to have a strong power hitter and an ace on the pitching mound, but you also need players who get on base consistently, provide solid defense, or can deliver steady relief pitching to round out a winning team. In investing, the comparison is diversification. We construct portfolios that include investments focused on growth of small, medium, and large companies within the US, but we also invest in innovative companies globally, real estate that provides a differentiated risk/return profile, and bonds that offer both yield and relative stability. Each investment serves a specific role, just like each player who plays a particular position. Over the course of the season, different asset classes or players will be important at varying moments. Having a diversified lineup makes portfolios more resilient through difficult stretches of a market cycle. 

For every baseball team that’s ever won a championship, they will tell you that it was the preparation in February that led to victory in October. It wasn’t serendipity, even if the season included a few fortunate breaks as well as some unexpected challenges along the way. Good financial planning and portfolio management similarly plan for bumps along the way while rebalancing to a fairly consistent strategy through the ups and downs of the market. 

This process looks great on paper, but we know it can sometimes be difficult to remain focused on the long-term when short-term volatility rears its head. As legendary baseball player and manager Yogi Berra once said, “Baseball is 90% mental, and the other half is physical.” For our clients, we help with the technical “half” of portfolio construction and financial planning, as well as partnering with them through the realities of life that are often harder to quantify or predict. That “90%” of life decision-making that is based on perspective, attitude, and persistence is what ultimately leads to long-term success both on and off the field.  

[1] In America’s Pastime, Baseball Players Pass A Lot of Time WSJ 

[2] How Much Does The Stock Market Move On Average A Day? Financial Samurai