Posted
3/13/2003
The Speculator
11 stock-slugging
tips from Ted Williams
The late baseball great studied hitting as closely
as a stock strategist studies markets. In fact, Williams' hitting rules can
easily make you a better investor.
By Victor
Niederhoffer and Laurel Kenner
"Get a good ball to hit."
-- Rogers Hornsby to Ted Williams, on the single most important thing for a
hitter.
A person,
a field, a book. Sometimes they come together with such genius that you wish to
carry the lessons around and apply them to everything you do. Such is the case
with Ted Williams’ "The Science of Hitting," widely considered the
definitive book on the subject. With the baseball season soon starting, the
market reeling and investors searching for a rudder, it seems particularly
appropriate to learn from the book’s timeless lessons for all fields. But we’ll
go even further. We’ll show how to use this method to make a profit by trading IBM
Williams
was the last batter to achieve the magic .400 average in a full season -- 1941,
when he hit .406. (He also had .400 averages in 1952 and 1953, when his seasons
were cut dramatically short because of Korean War service.) He is considered
one of the three best hitters ever, with Babe Ruth and Rogers Hornsby. “I had
to be doing something right,” he said. “And for my money the principal
something was being selective.”
His
selectivity was unique and inspiring. He divided the 4.6-square-foot batter’s
box into 77 zones, and assigned each a hitting percentage. The sweet spot was
high over the middle of the plate, where the batting average hit .400.
Rule No. 1: Wait for your pitch
Warren
Buffett cited "The Science of Hitting" in his 1998 annual report in a
discussion of his favorite subject: How the market doesn’t look good to him.
(His most recent annual report, published Saturday, repeats the sentiment.)
Buffett said he, like Williams, follows Rule 1 and waits for the great pitches
-- the great companies -- and holds his fire until they arise.
After
Rule 1, we will expand the list of hitting rules to 11, drawing from the
lessons in Williams’ book.
Rule No. 2: Study the first pitch
Williams
let the first ball pitched to him go by without a swing about 95% of the time.
He used the first pitch to find out as much as possible about the pitcher: his
speed, how far his curve broke, his patterns and his motions. In one anecdote,
Williams described how Bob Lemon, whom he rated one of the five toughest
pitchers he had faced, knew that Ted always let the first one go by. So once,
when Williams whacked Lemon’s first pitch for a home run, the pitcher yelled,
“What the Hades you doing?”
Investing
application: The way the market opens each day can be thought of
as the first pitch. Often it tells you which way the public is leaning, how far
the professionals are willing to lean against them and how different today’s
level of optimism is from yesterday’s. For short-term traders, it’s often
better to get a fix on the open instead of becoming fully committed to an
overnight position. That way, the risk is reduced. The tactic can be extended
to waiting until the second day of the week to trade, as the first day provides
the kind of learning and predictivity that other days lack.
This
rule has a corollary: Don’t hit anything you haven’t seen. The reason is
that you have to see if the pitcher has a little extra today. You can judge the
tempo and the motion. If it’s a curve, how far is it breaking> Did it go
over the plate in a tough spot?
As
we noted in our article last week, there’s no such thing as a free lunch. (See
“The IPO pickings are slim -- but profitable.”)
The same way you don’t wish to take any propositions that are too good to be
true, you don’t wish to invest in anything you haven’t seen before. Much better
to mark time and see the results that a similar opportunity has created for
others. Chances are, it left them in a tough spot.
Rule No. 3: A light bat is best
Williams
felt that a light bat gave him flexibility and speed. Just a fast flip was
enough for a home run. He used light bats 15 years before other power hitters
like Willie Mays, Mickey Mantle and Harmon Killebrew discovered them.
Investing
application: The light position is as important as the light
bat. Don’t ever get so extended in an individual stock or market that you can’t
flip the position without a big loss. Pay attention to the roach-motel trap.
It’s so much easier to get into many positions than to get out. In this regard,
the specially constructed derivative positions of the major investment banks
are minefields that in our experience are crucial to avoid at all costs.
Rule No. 4: Take account of ever-changing cycles.
Williams,
a left-handed hitter, liked to pull the ball to right field. Cleveland manager
Lou Boudreau had his defensive players move to the right when Williams came to
bat to take away his safe shots. To counter this, Williams began one season
with a heavy bat that he could choke up on, and poked pitches into left field.
Then all the managers said, “The old man can’t pull them any more.” But around
the middle of the summer, Williams returned to using lighter bats. By late in
the season, other teams had given up on the shift -- and the field was much
bigger for Williams.
Investing
application: In our book, "Practical Speculation," we
observed that markets change regimes from value investing to growth investing
and from low-caps to high-caps just when most investors are leaning the wrong
way. (See our Web site, Daily Speculations.com.) Here is a new one:
Markets go through stages when trend following is good and others when reversal
trading is good. It is wise to play the reversals after the trends have been
looking good, and to follow the trends after the reversalists have been doing
well.
Rule No. 5: Practice, practice, practice
Williams
liked to quote Rogers Hornsby’s motto: “A great hitter isn’t born. He’s made.
He’s made out of practice.” And no hitter practiced more than Williams. He
carried a bat around with him at all times. In practice, he said, you should
never miss the ball. He kept his mind in practice as well. While waiting in the
dugout, he concentrated on the count and the pitch, and was always ready to get
right into the game.
Investing
application: There is never a time when you can’t improve your
market results by practice and its cousin, concentration. Paper trading any
system is a must before implementing it. Counting out any assertion to
determine if it’s true would protect investors from almost all the false nostra
and mumbo they are subjected to every day. Paying attention during the market
day, even when you don’t have a position on, is just as important as watching
the game from the dugout. One of the things that goes with practice is memory
and counting of situations so that a proper base of operations can be developed.
Ted could remember the count, score, pitcher, standing and landing place of
each of his first 300 home runs. Can an investor remember the events leading up
to the first 150 big gains and losses? If not, write them down.
Rule No. 6: Hit according to your style
Everyone
has a different style based on personal strength, speed and size. Trying to
copy somebody else’s style will take away your natural assets. The purpose of
training is to add to these natural assets, not take them away.
Investing
application: Most investors have a natural predilection toward a
certain style, based on their wealth, their tolerance for risk, their desired
return and their tax bracket. A technique good for somebody who wants to
accumulate money for his kids’ college tuition is far different from one
designed for people wishing to salt away enough to pay medical bills in case of
disaster after retirement. Which leads to:
Rule No. 7: Change your game based on the count
When
the count is 0 and 2, expect a curve to the low inside. But when it’s 2-0, a
fastball down the middle is likely. Choke the bat up in the former case and hit
from the heels in the other. Nothing pleased Ted more than to get a chance at a
pitcher who had fooled him with an out on the same count as the previous time.
He knew exactly what to expect.
Investing
application: After four down days in a row, don’t expect a
fifth. After the market has oscillated back and forth for a few weeks or
months, don’t expect continued oscillation. If last Friday was an up day,
chances are this Friday will be a down day.
Rule No. 8: Always be ready to adjust
You’ll
never get a perfect pitch, and even if you could, conditions are always
changing. As the great New York Giants pitcher Christy Mathewson explained, “If
they start hitting my fastball, they don’t see it any more that day.”
(Mathewson was one of the game’s dominant pitchers between 1901 and 1915.)
Investing
application: Ted knew he could be affected by changes in light,
shadows and wind. He would stop the game when a big black cloud passed by. As
he observed, if the wind is blowing a gale in from centerfield, it would be
silly to try to hit the ball 479 feet. The weather has a big influence on the
market also; rainy, miserable days in Manhattan inordinately occur in conjunction
with plummeting markets. During the Christmas season, the thoughts of market
players run to great returns and gifts from spectacular performance in
low-priced stocks and growth issues. Yet no system, no technique is good for
all seasons. Be young-hearted and ready to change.
Rule No. 9: Pay proper attention to equipment
When
players started using pine tar or resin and oil on the handles to improve the
grip, most of them let it stay on a week before scrubbing it off for a fresh
coat. But Williams cleaned his bats with alcohol every night. He would take his
bats to the post office so he could weigh them until the owners sprung for a
scale in the clubhouse. He once told the groundskeeper in Kansas City that the
back of the plate was a little too low and that he felt like he was hitting
uphill. The next time he came to Kansas City, it was level -- and he hit two
home runs that day. The Kansas City manager was so incensed that he almost had
the groundskeeper fired.
Investing
application: A good investor has all his materials ready for him
at the beginning of each day. His Value Line is bound and updated. His Wall
Street Journal is updated, and if he’s like Vic, his books of actual prices
every 30 minutes for the last 40 years for 15 separate markets are just a
pencil’s throw away.
Rule No. 10: Get some torque
Williams
liked to start every meeting with, “What do you know about hitting?” At the age
of 81, in a wheelchair, he had one such meeting. He drew a diagram to show how
the pitcher has to throw the ball from 16 feet high to 4 ½ feet over the plate.
That’s down. You have to hit up to be on the same plane the ball is coming
from. Similarly, he emphasized the importance of getting some counterbalance --
some torque -- into the swing by cocking the hips before exploding to square
with the pitcher.
Investing
application: The principles sound to us similar to those who
believe in the cyclical nature of stock prices. If the market is sharply down,
the path of least resistance is sharply up.
Rule No. 11: Go for the goal
Time
and again, Williams risked everything to go for the big hit. The morning of the
1941 season’s final day, Williams was hitting .3996, which meant it would round
up to .400. But when manager Joe Cronin told him, “You can stop now and be
assured of glory in the history books.” Williams would have none of it. He
played in both games of a doubleheader and went 6 for 8 to finish the season at
.406. Later, when opposing teams pulled the Williams shift on him, he refused
to choke up and fungo singles into left field, instead continuing to go for the
pull home run to right field. He knew it was more valuable to the team for him
to get a home run one-quarter of the time than a single one-third of the time.
After he finished playing baseball, he became the spokesman and prime mover of
the Jimmy Fund, a worthy charity providing care and comfort for kids with
cancer. He also became an avid sport and flyfisherman -- some said the best
ever.
Investing
application: Have great goals for your market performance. The
only ones who can go for the singles are the market makers, who control the vig
– the fee on every transaction. In a study of the performance of the riskiest
companies, reported in our March 8, 2001, column "5 rewarding stocks from the ragged edge,"
we found that the companies in the top half of past volatility as measured by
their standard deviations performed some 30 percentage points better in 1999
and 2000 than the companies in the bottom half of volatility.
We
hear a voice from the back of the room saying: “Here is the Spec Duo doing
exactly what they tell others not to do, reporting a plausible sounding homily,
backing it up with anecdotes and selected remembrances of triumphs and
failures, with no testing.” Yes, indeed; a rule that sounds plausible may not
work well in the market. The Specs are not content with a rule until we
quantify it. To this end, we’ve taken the heart of the Williams’ approach,
namely: Make the pitcher work.
Ted
liked nothing better than to work the count to 2-2 or 3-2, gaining knowledge
and tiring the pitcher out in the process. We found the same thing with IBM.
If, during the first four days of the week, it goes up only one or two days,
it’s highly bullish over the next three days (through the next Tuesday). The
average gain we found: a little more than three-fourths of a point. All other
patterns are random.
In
the market, then, follow Hornsby and Williams: Wait for a good ball to hit.
Final note
We
have some highly erudite analyses of the baseball-market relation on our Web site.
Kindly e-mail
us with augmentations and we’ll send a cane to the best one to
memorialize our mutual education.
At
the time of publication, Victor Niederhoffer and Laurel Kenner did not own or
control shares of any of the equities mentioned in this column.