The Writer’s Coin

I have a long-term goal of building a simple yet robust analogy that will tie investing with baseball. I’ve posted a few times on this (here and here) and I’m always keeping an eye out for more/better ways to tie the two together.

Why am I doing this? Well, it gives me something to blog about, for one. But I’m also looking at a way to open up the world of investing to people who have built of a wall around money matters.

“I don’t get it”

“It’s just not for me”

“I hate math”

“I don’t have time”

“I hate reading The Wall Street Journal”

Those are all very common but what I’ve noticed is that a lot of the people that point to these reasons are actually doing a sort of investing already: they play fantasy baseball.

I’m not a fantasy-baseball fan. In fact, I really dislike seeing fans cheer on player X because “He’s on my team today!” But that’s a whole ‘nother issue that has to do with my quirks and extreme hate for petty, insignificant things.

But these people do things every day that responsible investors do: read up on what’s happening and process tons of data. So why not talk to them in their own language so they can “see” the parallel between the two and maybe get interested in investing? Who knows, their skills at analyzing and processing data in the baseball world could translate into the investment world and make them some money.

So yesterday I thought of a good way of explaining diversification. According to Investopedia, diversification is “A risk management technique that mixes a wide variety of investments within a portfolio.”

Snooooooooze, right?

My Turn:

You know how sometimes in Spring Training bad teams (like the Nationals or the Pirates) still don’t know who is going to play X or Y position so they bring in like 17 minor leaguers to compete for that 3B spot? And how much better you feel as a fan when more players are brought in to compete for that spot because you know that out of 17 at least one of them should come out and prove that they should start? The whole idea is to win ball games, and by having more guys competing for that position, the odds are better that the player manning 3B will end up contributing towards that end goal of winning more games.

Take the Nationals, for instance. They have two established major leaguers vying for that 1B spot: Nick Johnson (career .395 OBP and 23 HR in 2006) and Dmitri Young (38 2B, 13 HR, and a .320 AVG last season). One of them will win the spot and the other will most likely be traded for another useful player or a prospect that could contribute in the future. How good do those fans feel about the contribution they will get from their 1B? Really good.

The White Sox have Joe Crede (gold glove-caliber defense, 30 HR in 2006) and Josh Fields (young, cheap, and hit 23 HR in 100 games last year) at 3B. One will play and the other will either be traded (Crede) or go to the minors (Fields). Either way, the White Sox will be covered at that position.

Then you have the Brewers and their starting rotation issues. From the aforementioned article: “That would leave one job to be won from a group of candidates that includes three members of the ‘07 rotation: Chris Capuano, Dave Bush and Claudio Vargas. The Brewers plan to give rookie Manny Parra a good look in camp as well.”

That’s four or even five guys competing for one spot. Capuano has pitched 200 innings in a season twice before and has a career WHIP (a statistic that measures how many hits and walks a pitcher gives up per inning pitched—anything at or below 1.33 is considered “good”) of 1.33. Dave Bush pitched over 200 innings in 2006, had a WHIP of 1.14, and has a career WHIP of 1.25. Claudio Vargas is lefthanded, and Manny Parra is the Brewer’s second best minor-league prospect with excellent control. These guys don’t make up the rotation—they are competing for the number five slot. This bodes very well for their team and their rotation.

That’s diversification. The same thing happens when you invest. You can pick out your favorite five or ten stocks and hope they do well. And, if you did all your homework and really know each one of those as well as you possible can, that could be enough. Hey, that’s what Warren Buffett does, and he’s only the most successful investor of all time. He follows the adage of “put all your eggs in one basket and then watch that basket.”

But what if you could bring in hundreds of players to compete for several spots? What about 500 players? Wouldn’t you feel a lot better? You would be taking a lot smaller of a risk and the odds for success would be much higher.

That’s what index funds and mutual funds do: buying one share of these “baskets of stocks” means you get a little piece of hundreds of companies. This means your odds of snagging a stock that does really well is very high and if another stock does really well, you’ve managed to minimize your losses.

Investing and talking sports can be very similar. Both require that you keep up on what the latest news is, both rely heavily on statistics to measure performance, and both of them can be fun. One major difference, of course, is that investing can make you money while fantasy baseball will not.

Which would you prefer?

Can you think of any good sports analogies that might make investing or personal-finance topics clearer to people who aren’t “interested” in learning about them?

*For other sports analogies, check out these posts.

Tags: baseball, diversification, investing and sports