Patience is a virtue in the popular US sport, much as it is in investing.
In American culture, baseball plays a similar role to that which cricket does in Britain. But since not that many Britons play baseball, our knowledge of the game generally starts and ends with films like Bull Durham, Field of Dreams, Major League and The Natural.
While a few baseball metaphors such as "step up to the plate" and "touch base" have crossed the Atlantic, when you're wearing your private investor's hat the most relevant thing about baseball is how Warren Buffett of Berkshire Hathaway (NYSE: BRK-B.US) fame uses it to illustrate the importance of being patient.
Three strikes and you're out
In baseball, a batsman who has three strikes against him is out. A strike is called if the pitcher throws the ball through the strike zone above home plate, if the batter swings at a pitch and misses or if he hits the ball and it doesn't land in the ninety degree arc that marks the baseball field (but if you have already two strikes, the latter isn't a strike).
Buffett argues that investors should view investing as if they were a batter who cannot be struck out. What you should do is to take your time and wait for a pitch (investment) that is attractive enough for you to hit (buy), while you let the less attractive ones pass you by. Here's his original quote, which dates back to the early 1970s:
"I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. You wait for a pitch you like."
Acquire patience
As the saying goes, patience is a virtue -- but, unfortunately, it isn't possessed by some people in the fund management industry. Buffett goes back to baseball to illustrate the manager's dilemma:
"The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
Some investment managers have been known to turn over their entire portfolio within under a year. A report commissioned in 2010 showed that average holding period for shares owned by an American institutional investor was just 17 months, which is equivalent to an annual turnover rate of about 70%.
The increasing spread of high-frequency trading, where shares are bought and sold within minutes by sophisticated computer programs, has almost certainly shortened this.
Patience reduces your costs
Patience matters because excessive trading will cause those commissions, bid-offer spreads and the ½% stamp duty levied on purchases of British shares to knock a couple of percentage points off your annual return.
When I was younger I used to over-trade, and several times in the 1980s my turnover exceeded 100%, but as I've grown older I've acquired a lot more patience when it comes to investing. So far this year my turnover has been about 4% of the portfolio as of 1 January (12% annualised) mostly because I trimmed some of my larger holdings to raise cash and use up my annual capital gains tax allowance.
This has been reinvested in some highly speculative shares, which I aim to hold through thick and thin for quite some time -- notably, the Dutch company NXP Semiconductors (NASDAQ: NXPI.US), the global leader in "near field communications" (NFC), which involves the contactless short range transmission of information.
The story behind my purchase of NXP is driven by its technology rather than by its current earnings. Should NXP's NFC become the global standard for cashless payments via smartphones during the next few years, as I hope, then my stake should then be worth several times what I paid for it.
Some examples
Nowadays it takes quite a bit of bad news to get me to sell, whereas a couple of decades ago I might easily have been panicked into bailing out. I'm a hopeless short-term trader, so I focus instead upon where the company's business is going.
In the case of some of my better-performing shareholdings that I've owned for around a decade, such Dragon Oil (LSE: DGO) and Yum! Brands (NYSE: YUM.US), I've seen some wild price swings and am much better off today because I was patient.
In Yum!'s case, I believe that its KFC restaurant chain has the scope for huge expansion in both China and India, with sales possibly growing by up to five times within a decade. As for Dragon, I'm happy to hold if only because I'm reluctant to pay any more capital gains tax!
Good old Yogi
To finish off, I thought I'd introduce another source of baseball wisdom, albeit one that's not particularly relevant to investment: the New York Yankees' legendary catcher Yogi Berra.
Yogi had a stellar baseball career, but today he's equally well-known for his rhetorical tautologies, or "yogiisms", some of which have become part of the everyday lexicon, such as "It ain't over till it's over", "You can observe a lot by watching" and "The future ain't what it used to be".
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More from Tony Luckett:
> Tony owns shares in Berkshire Hathaway, Dragon Oil, NXP Semiconductors and Yum! Brands.
