The Lure of the Long Ball

The Home Run. With one single swing of the bat, all the baserunners and the batter come home to score. For a hitter, it doesn’t get much better than knocking the ball out of the park.

Between them, Reggie Jackson, Jim Thome, Adam Dunn, Sammy Sosa, and Alex Rodriguez have had 2,942 of these magical moments and rank amongst the most prolific sluggers in the game. They are also the five players with the most career strikeouts. Barry Bonds, the home run leader, with 762, struck out more than twice that much.

These men were willing to strike out to swing for the fences. Perhaps the same can be said of those chasing investment homers.

Both types of home runs are high risk, high reward ventures, and both can be game changers. The difference is the magnitude of those risks and rewards.

In baseball, it’s strike three, and you’re out. But this is a game where even the best hitters get out 60% of the time. So the worst case is an out, and the winning team will have at least 24 of those. On the other hand, when you’re swinging for investment homers, you face the potential of a total loss of capital.

As for upsides, the maximum in baseball is four runs; a ‘grand salami.’ On the investment side, it is relatively unbounded. Think of early investors in Facebook, Amazon, and Google. Peter Thiel cashed out on over $1 billion in Facebook stock from an initial investment of $500k.

That’s exciting stuff, and the lure of hunting such opportunities is strong. Psychologists and neuroscientists have even compared this excitement to the effects of cocaine on the brain. And under the haze of a potentially big payoff, there is the tendency to overlook or underemphasize the risks.

The other push to swing for the fences is the fear of missing out (FOMO). Unlike baseball, where you never know what could have been if you had gone for it, in investing, the future will painfully show when you passed on a big winner.

This anticipation of regret and the draw of the big payoff can have us chasing too many bad pitches in search of the moon shot. As grizzled baseball managers would remind us, you can’t try to knock it out of the park every trip to the plate. While it would be fun to watch an entire line-up of sluggers swinging for the fences, that approach might not fare well over a 162-game season.

A winning team and a robust portfolio consist of all types of players. And there are an infinite number of player combinations that can result in success. You just have to choose the right mix and balance for you. The lovely thing about investing is that, unlike baseball, everyone can be a winner.