Home \ About Us \ Fat Pitch Approach to Equity Investing

Fat Pitch Approach to Equity Investing

Warren Buffet often uses baseball as a metaphor for investing. One of his most famous relates to the Fat Pitch approach to equity investing. In baseball, a batter usually has a favorite pitch, called his "Fat Pitch". However the batter does not have the luxury to wait on his pitch. The batter is forced to swing at pitches any pitch in the shrike zone or risk being called out on strikes.

Many investors and investment managers show traits of this batter when making investment decisions. For fear of "being called out on strikes" (i.e. varying from their benchmark), these managers invest in stocks that lack a sustainable competitive advantage, have marginal management and do not provide a margin of safety. They lack discipline and forget valuation parameters.

But what if baseball players did not get called out on strikes? A batter could watch pitch after pitch, waiting on his fat pitch without being called out on strikes. When he finally saw the Fat Pitch coming, the batter would swing with greater confidence and have a higher probability of getting a hit (and even a home run). Of course, the games would be much longer and higher scoring. Batters would routinely average above .700 and pitchers would also have less value in the league. But back to investing.

Investing is like baseball, except that there are no called strikes. We can evaluate company after company and wait until we find the one that meets all our criteria AND provides a margin of safety. These would be our Fat Pitch Investments. Fat Pitches gives us a higher probability of success. This is the general idea of the Fat Pitch Equity Selection.

More specifically, the strategy has four parts.

1. Focus on Fat Pitch Companies. These are companies with sustainable competitive advantages, strong balance sheets and great management. Companies with predictable earnings and long term staying power. Fat Pitch Investment Criteria.

2. Wait for Fat Pitch Prices. Companies with sustainable competitive advantages, strong balance sheets and great management usually trade at premiums to intrinsic value. However occasionally, something will cause the price to drop to a point that will provide a prudent investor a margin of safety for purchasing the stock. An investor must be prepared to act quickly as these are usually temporary opportunities. This means that the research and valuation work must have been done far in advance. An investor must already know the company and industry intimately in order to quickly determine whether the cause of the drop is temporary or permanent.

3. Hold a Concentrated Portfolio. When you see a fat pitch, load up and swing for the fence. There are very few great ideas in any given year. Buffett has said he's happy to find one great idea each year. He's also said that when there's nothing to do, he does nothing. We would never hold more than 20 stocks in a portfolio except in highly unusual situations. Having too many stocks borders on speculation and is a method for diversifying away the market risk.

4. Don't trade very often. Trading costs are real and consist of transaction cost and taxes. If you are following the Fat Pitch approach you won't need to trade often because you will have a portfolio of great companies with wide economic moats. Companies with sustainable competitive advantages continue to create shareholder value year in and year out.

These are the parameters we use when building our equity portfolios. These parameters are also incorporated into our evaluation of investment managers - part of what makes a "Guru Manager".

For more specific characteristics of what we look for in an investment manager review "What it takes to be a Guru" . And please review Fat Pitch Investment Criteria for further details on what we look for in great investments.

Fat Pitch Philosophy and Diversification
Our belief in diversification ("Our Investment Beliefs"), does not conflict with our "Fat Pitch Philosophy". The Fat Pitch Philosophy relates to equity selection process within the equity allocation of a diversified portfolio. We believe that asset allocation among equity, alternative investments and fixed income makes for a smoother ride.