Rule Number One

One of my VectorVest friends recently circulated a terrific article written by legendary Boston Red Sox hitter Ted Williams. Williams dominated baseball in the ’40s and ’50s like no one else before or after him, hitting for power and average. In 1941, Williams became the last .400 hitter in major league baseball. He finished his 19-year career with a lifetime batting average of .344. He won the Triple Crown twice, meaning he led the league in batting average, home runs and runs batted in.

He may be the best baseball player of all time, but what does this have to do with investing? Well, the subject line on the email going around was this, “Someone asked me today, ‘What is your trading strategy?’ And I sent them this.”

“This” was the article about hitting written by Ted Williams himself. Here is how he started the piece:

“The first rule of hitting was to get a good ball to hit. I learned down to percentage points where those good balls were.”

In an interview later in life, he stated, ‘A good ball to hit is something that is easy, one that looks good to you, that you can hit almost every time.’ If it doesn’t look good, if it’s not in the right spot, it’s not a pitch you want to swing at.

He divided the strike zone into a matrix. His “happy zone” was not much more than a sliver where he calculated he could hit .400 or better, and he wouldn’t swing if the pitch was outside of his happy zone. He also had a plan for every pitcher he faced, anticipating what type and location of pitches he would likely get in every pitch count and every situation.

Ted Williams article

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Baseball analysts say Williams rose to the top because of his analytical approach to the game. We can apply his approach and insights into our own investing.

  1. WAIT FOR THE PERFECT PITCH. This is a setup that you can count on and has proven to make you money more often than not. It should be one that you can pick out with no ambiguity. If you are not sure, and you have to think about it for more than a minute or two, wait for the next pitch.
  2. BE SELF AWARE. Know your strengths and your weaknesses. Are you investing for the long-term or trading for the short-term? Are you willing to be aggressive when the situation calls for it, or are you more comfortable playing it safe, going for a consistently high batting average rather than a few big hits with many more strikeouts?
  3. KNOW WHAT YOU ARE UP AGAINST. Williams studied every pitcher and every situation, anticipating what to expect. In the same way, you need to be aware of what the market is most likely to throw at you. You can be more aggressive and swing for extra bases when the market is rising from the bottom. When the market is closer to a top, you need to know it is better to play small ball. Small ball is trading fewer positions with fewer shares, using tighter stops to minimize losses when the trade is against you and you are behind in the count. You take profits early, not trying to stretch every single into a double.
  4. ANALYZE YOUR TRADES. Remember, Ted Williams had the highest on-base percentage in history, yet he was still sent back to the dugout more than half the time. He tried to learn from every at bat, and so should you. What were the conditions and the setup that made a winning trade or a losing trade? Did you follow your plan?

If Ted Williams was an investor instead of a baseball player, waiting for the perfect setup would have been his RULE NUMBER ONE.