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As a writer, I find that one of the best ways of explaining new things to people is with analogies (you know, “the car is fast like a bullet” or “you are such a monkey.”).

I’ve been going back and rereading some basic investment information to get me back into stock mode after just sitting back and being an index-fund investor for so long. I’ve reached the conclusion that index funds are indeed a great thing, especially for the beginner investor, but if you’re willing to put the time and effort into learning (this is where I like to think of myself), individual stock picking has a very definite place in your portfolio.

So I’ve been going through Morningstar’s Classroom courses to re-familiarize myself with the particulars of deciphering financial statements, knowing all the ratios, and all the other “stats” that exist to tell us how a particular company is doing.

And I found this little nugget when stating that a company’s capacity to create future earnings is the most important quality to look for in a company when picking stocks:

The main thing you can control is what ship to board. Think of the seaworthiness of a ship as the competitive positioning of a business, and the horsepower of the engine as its cash flow. Some ships have thick, reinforced metal hulls, while others have rotting wood. Clearly, you would pick the ships that are the most seaworthy (with the best competitive positioning) and have the most horsepower (cash flow).

Though the ship’s captain (company management) certainly matters, the quality of the ship is more important. On a solid vessel, as long as the captain does not mess up, there is not much difference between a good and a great captain. Meanwhile, there is nothing the best skipper can do if the boat’s engine is broken and the boat is constantly taking on water (poor business). To relate this to stocks, business economics trump management skill.

How is that for an analogy? Isn’t it much easier to understand this way?

I’ve had this idea for a really long time to create a series of articles (or one really long one) that connect investing and sports (specifically baseball because it’s what I know).

Why? Well, there are so many people (like me) that are huge stat heads when it comes to their sport—I mean it’s really impressive the amount of knowledge and understanding that these people can acquire from the game simply by looking at numbers. Not just “simple” numbers like batting average or home runs, we’re talking sabermetrics here.

It’s very complicated and very in depth and looks like something out of an Econ textbook.

Boring, right? Wrong.

But these same people are usually very wary of getting into investing because the lingo is prohibitive for beginners. If only someone (I’m the hero of this story) were to draw the line between their sport and investing and explain how they go together, then maybe the barrier of entry would be torn down (and a parade in my honor would be thrown).

The whole point is to break down that feeling of “I can’t do this, I don’t know anything about investing.”

Here is what I have so far:

-A stock price is to investing as a player’s jersey is to sports, completely meaningless

That’s just a little jab at the trader/speculator crowd to win the sports fan over. Haha, I know it’s hilarious. But I intend to really flesh this out and draw some solid parallels, it’s just not easy and it’s also why I’m in Morningstar’s Classroom thing, I need to go back to basics and become and expert if I really want to do this.

Would you be interested in this sports/investing analogy article?

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