Increase your Value Investing Batting Average

First and foremost we are value investors, who strive to purchase discounted securities that are trading below their intrinsic values based upon our research and analysis. When searching for value investments, we begin by first focusing on some financial metrics that may help us identify a suitable list of underpriced candidates. There are so many stocks in the investment universe that we would probably die at our desks before we were able to go through them all one by one. In order to limit our downside risk and not lose money we want to focus on companies with sound financial strength. There are many ways to sort or screen through a universe of stocks such as Piotroski’s F-Score or Altman’s Z-score. Really what we try to do is decrease the pool of candidates to eliminate the weaker investment options. This allows us to focus our time and efforts on more attractive investments. 

It’s sort of like baseball great Ted William’s approach to hitting as described in his famous book “The Science of Hitting.” For those of you who might not be familiar, Ted Williams is considered one of the greatest hitters of all time and was the last player to have a batting average over 400. Anyway, Ted had a batting approach that is easily comparable to an approach one should take with value investing. He took detailed notes throughout his career and calculated his batting average based upon where each pitch was thrown by the pitcher (aka doing his bottom up research). This observation made him realize where his strengths and weaknesses were and helped him wait to swing at pitches that he had the highest probability of getting a hit.  He even created a real life chart with colored tennis balls outlining the exact batting average of each pitch within the strike zone. You can actually see this in person at the baseball hall of fame in Cooperstown, New York. 

You should think about Ted’s approach when looking for potential investments. Should you swing at every pitch? No, you want to wait for ones that provide you the best probability of success, and you can do this by investing in companies that are financially sound. Once you have narrowed your list of stocks down, then you need to begin a more in depth rigorous fundamental analysis, but it helps to focus your efforts in the right places. Do you have any questions? If so email us or comment, we want this to be an interactive blog.

For more on Piotroski’s F-Score, Altman’s Z-Score, The Science of Hitting