One of the biggest misperceptions in the field of investing and trading securities is the viewpoint that investors have to be right nearly all of the time to be deemed successful. In other words, they have to accrue a batting average that reflects vastly more winners than losers. The batting average for an investor is derived by computing the number of investments that make money as a percentage of total investments made. In baseball, a 0.400 batting average would be considered the holy grail. This was last accomplished by Ted Williams in 1941. The argument can be made that Ted Williams was the greatest hitter of all time. In the world of investing, a 0.600 to 0.650 batting average is considered top-tier, while professional investors often look for at least 0.500. This tells me that picking winners in the stock market is considerably easier than hitting a major league curveball.
In both baseball and investing, the slugging percentage supersedes the batting average in terms of importance and relevance. On a baseball diamond, the slugging percentage measures a hitter's batting productivity, and it differs from batting average because it values hits differently by weighing them differently. A single is worth one base, a double is worth two bases, three bases for a triple, and accordingly a home run is worth four bases. The total bases are the sum of singles + (2 x doubles) + (3 x triples) + (4 x home runs). Slugging percentage is the total bases divided by the number of at-bats for a player, ranging from 0.00 to 4.00. A player near the -0- level will soon be looking for a new day job. While a player at or near the 4.00 level will most assuredly be a deity. In general, a high slugging percentage tends to lead to more runs being scored and to winning more games.
Concerning investments, the slugging average is the average absolute gains for successful investments divided by the average losses for unsuccessful ones. This would apply to both realized and unrealized gains and losses. The key to investment success is ensuring when you have winning ideas, they are big positions generating outsized returns (e.g. doubles, triples, or home runs), and when you have losing positions, the positions become smaller (singles). Your losses are minimized and do not significantly matter. Thus, the best investors focus more on "slugging average" - the magnitude of gains - rather than just the frequency of winning trades.
What you're looking for are multi-bagger winners that go 3x, 4x, 10x, and more. Multi-bagger winners drive the majority of returns for exceptionally robust investment portfolios. Although multi-baggers don't grow on trees, they are out there just waiting to be discovered. My Achilles Heal is that I tend to prematurely realize relatively decent gains by selling early, and then rebalancing and reallocating to other positions. This approach does not allow gains to run, and sometimes they run wild. A case in point - I bought Meta (formerly FaceBook) in 2013 for $28 per share and then promptly sold it for a modest profit a few months later. A second case in point - I bought Micron in 2018 for $52 per share and then sold it a year later at a 20% loss. It is too painful for me to write down the current share price for those respective companies.
One of the key insights thus is that an investor can be correct much less than half of the time, with say a 0.400 batting average, and still generate high returns if the winning trades are significantly larger than the losing ones. Listed below are a dozen quotes from legendary investors that pertain to the subject matter of this blog:
1.) "Even the best investment analyst is going to be right just two out of three times." - Sir John Templeton
2.) "Most traders make money only in the 50 to 55 percentage range. That means you're going to be wrong a lot. If that's the case, you better make sure your losses are as small as they can be, and that your winners are bigger." - Steve Cohen
3.) "No investor can be right all the time. If an investor is correct half of the time he is hitting a good average. Even being right three or four times out of ten should yield a personal fortune if he has the sense to cut his losses quickly on the venture where he has been wrong." - Bernard Baruch
4.) "I am a professional mistake maker. One third of my trades are probably wrong." - Ray Dalio
5.) "I always say to people who come in to see me that you have to realize in our business a really, really good person is wrong 30% of the time. That's a world-class investor. Are you comfortable being wrong 30% of the time? By the way, you can't be wrong in a massive way." - John Phelan
6.) "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." - George Soros
7.) "If you're terrific in this business, you're right six out of ten." - Peter Lynch
8.) "During 68 years on Wall Street, I have been wrong about 30 percent of the time. That means a lot of losses. But it's the 70 percent right that matters. If any investor had been right all the time, he or she would have accumulated a considerable portion of the world's wealth. But as you might suspect, always-right investors don't exist, except among liars." - Roy Neuberger
9.) "Our portfolio managers have a tough job as you are wrong half the time. They get a report card every day that is an F. It happens to be that 53%/47% still is very profitable in finance, but it's still a tough report card. We hire the best and brightest and they go from having 90's as their average test score to 53%." - Ken Griffin
10.) "John Templeton said something to me a couple of years ago - he said if you are right 60% of the time and wrong 40% you will be a hero, and if you are right 40% and wrong 60%, you will be a bum. But I am sure he used more gracious language than that." - Peter Cundill
11.) "Five to one means I'm risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I'm still not going to lose." - Paul Tudor Jones
12.)"So you have flops. Maybe you're right 5 or 6 times out of 10. But if your winners go up 4-or10-or 20-fold, it makes up for the ones where you lost 50%, 75%, or 100%." - Peter Lynch
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