Playin' Small Ball

Playing small ball, Larry Hite managed to turn a $2 million managed account into $800million in eight years. Here is a quote from Larry Hite worth your consideration.

“Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. I have two basic rules about winning in trading as well as in life:

1.If you don't bet, you can't win.
2.If you lose all your chips, you can't bet.”

Small ball is the traditional offensive strategy in baseball. It is based on the assumptions that it easier to score a run with a man on base than with no men on base and that it easier to score from third base than it is from first base. Therefore, small ball concentrates on getting men on base. Managers using this strategy are perfectly willing to make sacrifice plays in order to advance a runner who is already on base. In recent years, innovations such as the designated hitter in the American League, smaller parks designed to increase the number of homeruns, the “juiced” ball that comes off the bat at a higher rate of speed, and steroids have made the long ball more important, but Major League Baseball teams are still playing small ball. In Japan small ball is the only way to play the game.

People like to watch homeruns both in life and in baseball. Small ball can be soooo boring. I want to hear about the man who bet his life savings on the initial public offering of Cisco, sold before the crash in 2000, and retired to Maui. The story about a man who bought shares in Coca Cola and 20 other blue chip stocks over a 20 year time frame with about ½ of his savings and then retired in North Carolina is boring by comparison.

I am trying to play small ball with my savings. I am willing to make sacrifices, such a driving a 13 year old car when I can afford to pay cash for a new vehicle, in order to get some money invested my Schwab Money Market account. Once I get that money on base, I look for opportunities and buy a little of this or a little of that in order to advance that money to second base. Sometimes I get lucky. I am able “steal” a base, as in a matter a months I watch one of my investments jump 50% or more. When I get nervous because the market seems too high or my investments are getting out of balance I bring some of the money on home and put it into an investment grade bond fund or treasuries.

During the recent unpleasantness I was buying all the way down. I was buying 70% stocks for my retirement account at work and adding small amounts to the core holdings in my self directed account. It is very scary to buy some stock, loose some money, then buy some more stock, and loose some more money. I was trying to increase the numbers of shares I owned, lower the cost of an average share, and buy dividends for the future. Dividends, by the way, are where it is at. In a perfect world, it would be wonderful to be able to live on just the interest and dividends from your investments. Imagine, never worrying about touching your principal. This strategy seems to working pretty well even in a disastrous economy. I took a beating on General Electric, but generally small ball is working as advertised.

I have watched the market jump something like 60% since the lows of this past March. During the past month or two I have started pulling some of my winnings off the table both because I believe the market to be overvalued and because my stock holdings are exceeding 55%* of my investments. This is small ball. If I was playing long ball I would be pulling all my winnings off the table. Unfortunately, my crystal ball did not come with an instruction manual so I can not state with certainty what the future might hold.

I wish I was younger, smarter, and richer. Unfortunately, I did not start a serious effort to learn about investments until I was about 50 years old. If you are young, start today. Time is your friend, particularly if you choose to play small ball.

And, Hey! Let’s be extra careful out there.

* The old conventional wisdom stated that an individual investor should hold his age in bonds, certificates of deposit, and cash. Hence, at 58 I should have 58% in fixed income investments and 42% in stocks. The new conventional wisdom states that these figures are too conservative given the risk of inflation. The new rule of thumb states that the individual investor should have either 110 or 115 minus their age in stocks. Hence, I should be holding 52% or 57% in stocks at any given time. I have decided keeping my stock holdings (including gold) under 55% sounds about right. I am shooting for 5% in gold but I have not yet reached this goal.