Investor and founder of Berkshire Hathaway (NYSE: BRK-A) Warren Buffett is renowned for many things, including being one of the richest people in the world. However for Fools such as me, of far more interest than the fact that Buffett is rich, is the details of how he became rich!
Thankfully, Buffett is very open with advice and insights about his investment approach. Some of the best sources for Buffett insights are his annual letters to shareholders, which he has literally been writing for decades.
One of the wonderful attributes of Buffett’s writings is his clear explanations of what can sometimes be complex issues. One way Buffett (like many other great writers) gets his message across is through making analogies, particularly ones that liken investing to baseball. To describe what works in investing, Buffett has previously said, “don’t swing for the fences,” his point being that if you try to hit home runs you risk striking out.
Don’t swing for sixes
Recently Aurora Funds (ASX: AFV) released a paper titled “Benefits of Multi Strategy Investing.” The paper included a very interesting statistic that would almost certainly make an analogy Buffett would use if cricket rather than baseball was his nation’s pastime.
Don Bradman, who is widely acknowledged as a true legend of the game of cricket, scored 6996 test runs during his career, which spanned 20 years. That’s a lot of years, a lot of games and a lot of runs by the great Sir Don. With such a grand record and reputation, most people would naturally think Bradman would have hit a lot of sixes. But guess how many sixes he hit in 20 years. Just six!
As Aurora put it, “Bradman was a low risk, high breadth player – results speak accordingly.”
As Buffett would most like put it: Bradman didn’t swing for sixes – he consistently accumulated runs when the ball was in his sweet spot.
Interestingly, once Bradman retired from cricket he proceeded to chair the board of Argo Investments (ASX: ARG) for many years. Argo’s investment philosophy of buying and holding quality stocks is not only consistent with Bradman’s low-risk batting strategy but also not dissimilar to Buffett’s.
As investors it can be dangerous to ‘swing for sixes’ when selecting stocks for a portfolio. It’s also dangerous if a board or management team takes unreasonable risks – which is why investors need to be equally as vigilant in avoiding companies that try to ‘hit sixes’ too.
As investors found out during the GFC, companies like Babcock & Brown extended themselves too far, taking on too much risk and leaving themselves vulnerable to collapse.
It’s much better for investors to invest alongside management teams that won’t risk ‘swinging for sixes’ with shareholder funds. The high quality team at NIB Holdings (ASX: NHF) is one such firm that acts prudently and in the interests of shareholders by keeping a keen focus on return on equity.
Identifying great managers is an important part of investing. Great managers will be better allocators of capital which could mean higher dividends. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”
Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.