top of page

Applying Baseball Strategy to Investment: Diversification for Winning Result

Updated: Aug 16, 2023



Finding similarities between baseball strategy and investment strategy can give you fresh insights, inspiring effective approaches, and successful strategies that work. Just like how baseball teams carefully strategize their plays, taking into account factors like timing, exposure, and batting averages to secure wins, we can apply similar principles to our investment strategies. For instance, by borrowing from the world of sports analysis, where timing, batting average, exposure, and slugging ratio influence player selection and desired outcomes, we can use a similar equation in our approach to investing.


In a nutshell, the "Success Equation" from the respected Harvard Business Press book (2012) can be applied to both sports and investing. For sports, it's all about multiplying possessions (faceoffs and clears) with possession efficiency (batting percentage or shots per possession) to achieve a win. Similarly, in the world of investments, we calculate excess return by considering opportunities (variance, cost, turnover, and dispersion) multiplied by decision making skills. It's a simple yet powerful way to compare winning strategies in sports to achieving success in investments.


In this article, I will use the success equation to explain why relying solely on a 5% T-bill investment is insufficient. While short-term T-bills may seem like a safe option at first, it's important to understand the immense advantages that come with diversification and long-term returns across different asset classes like equity, bonds, and cash. Throughout this discussion, I'll present three convincing reasons why embracing diversification can lead to successful outcomes in investments, drawing parallels between baseball strategy and the art of successful investing. So, let's step up to the plate and explore how diversification, long term return, and risk/reward ratio plays a key role in achieving winning results.


Reason 1: Diversification


Okay, picture this: Imagine we're a baseball team, and we only focus on pitching with our star player. Sure, they're amazing, but relying solely on them is like putting all our eggs in one basket. What about the rest of the team and our overall batting average? That's where diversification comes into play. Just like having a well-rounded baseball team with players in different positions, we want to diversify our investment portfolio too. We spread the risk by investing in different asset classes like stocks, bonds, real estate, and other market opportunities. This way, if one investment doesn't perform as well, we have others to pick up the slack. It's like having players who can step up and play defense when needed. Diversification helps us capture growth opportunities while protecting ourselves from unexpected events or market ups and downs. So, let's mix up our investments and play both offense and defense to score those financial wins.


Reason 2: Long-Term Returns


In baseball, the focus is not just on scoring a few quick runs but on winning the entire game. Similarly, when it comes to investing, short-term treasuries may offer higher returns initially, like scoring a single run in a single inning. However, when we shift our perspective to the long term, we see the bigger picture, just like aiming to win the entire game.


By taking a long-term perspective in investing, you allow your investments to benefit from the power of compounding and market growth, much like a baseball team capitalizing on each run to build momentum and secure the win. Just as a successful baseball team consistently performs over the course of the game, long-term investments have the potential to deliver more substantial returns over extended periods, despite the fluctuations experienced in the short term.


Reason 3: Risk and Reward


In the world of investing, there's a risk-reward tradeoff that's similar to baseball. Just like how making snap decisions to trade a player based on a couple of bad games carries risks, selling off a high-quality long-term company like UnitedHealth Group because of one bad quarter also involves a risk. This is akin to trading a reliable team member for a low risk/lower long-term return T-bill. Why is it risky? Well, interest rates can fluctuate, and the market winds can shift. In the end, you may end up losing your hedge. It's like opting for a safe play with a higher chance of success but potentially missing out on the opportunity for a game-changing home run.


In both baseball and investment, the decision on whether to embrace a higher level of risk depends on your risk tolerance and investment objectives. Just as a batter might take a swing at a high-speed pitch to hit a home run, you might be willing to accept a certain level of risk in pursuit of higher potential returns over the long term.


Conclusion:


Diversification allows us to spread the risk and potentially reduce the impact of volatility or unexpected events that may arise from relying too heavily on one player, or in this case, one investment. By embracing diversification, we capture growth opportunities and enable the rest of our portfolio to play defensively against potential interest rate changes or other market fluctuations. Often time, certain industry may provide some immediate gains, thinking long-term return allows you to tap into the compounding effect and the growth potential of other investment options. We are aiming to accumulate runs over multiple innings, long-term investments have historically shown the potential for higher returns. Long-term investments, despite some fluctuations in the short term, historically have shown the potential for higher returns over extended periods. Furthermore, accessing risk and reward is a relative component to meet long-term financial goals, such as retirement savings or wealth accumulation. By keeping your eyes on the ultimate goal of long-term financial security, you can make investment decisions that align with your objectives and set yourself up for a victorious financial future, just as a baseball team aims for a triumphant outcome at the end of the game.



 

Disclaimer:


The information provided does not constitute, in any way, a solicitation or inducement to buy or sell securities and similar products. Comments and analyses reflect the views of KW WEALTH MANAGEMENT at any given time and are subject to change at any time. Moreover, they can not constitute a commitment or guarantee on the part of KW WEALTH MANAGEMENT. The recipient acknowledges and agrees that by their very nature, any investment in a financial instrument is random. Therefore, any such investment constitutes a risky investment for which the recipient is solely responsible.


All investing is subject to risk, including the possible loss of your money. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or a mix of funds will meet your investment objectives or provide you with a given income level. We recommend that you consult a tax or financial advisor about your situation.


KW Wealth is neither a law firm nor a CPA firm; If you have questions concerning the meaning or applications of a particular tax law, you should consult an attorney or a CPA specializing in this area. This material is provided for informational purposes only, and nothing herein constitutes investment, legal, accounting, or tax advice or a recommendation to buy, sell or hold a security. Any views or opinions expressed may not reflect those of the firm as a whole. KW Wealth Management reserves the right to amend or change the content at any time and for any reason at its discretion.


Kimmy Wan, Founder and CEO of KW Wealth Management LLC, has over 25 years of experience in the financial services industry. Kimmy formally served as Vice President-Senior Financial Consultant for Charles Schwab Corporation for 13 years. She also served as Manager of Asia Pacific Relationship Management and a Mutual Fund Operation Analyst for E-Trade Financial Corporation, later acquired by Morgan Stanley. For eight years, she led a team of 20 bilingual stockbrokers to service Asia and Europe, providing necessary industry and market research, data, and risk analysis to mutual fund portfolio managers.


2023 KW Wealth Management LLC. All rights reserved.


Comments


bottom of page