It’s Not Batting Average that is Important, It’s Slugging Percentage

Ian Cassel Blog, Educational 1 Comment

Each investor’s strategy is and likely should be different from the next person. It’s good to be different. I think too many focus on cloning others when it’s a mistake. It’s not who they really are. There are 30,000 Elvis impersonators, and their combined income is far less than the original. Instead of cloning someone, take the valuable lessons and nuggets you obtain from studying the greats, and apply it to your own processes, experiences, and personality. This is what intelligent fanatics do. Be original.

In general, microcap investing lends itself more to an active strategy because many microcaps are small emerging companies and things can change quickly. You can’t afford to buy and forget. You need to buy and verify your thesis, and the smaller the company the more often you verify. When you initially make an investment, you can’t say “I’m going to hold this for 1-2-3-10 years”. No, you are going to hold it as long as management executes. This could be 3 months or it could be 30 years. In microcap, hold times are skewed towards the former (3 – 18 months) because there aren’t many microcaps that will prevail over the long-term.

You need to have a high hurdle for new ideas but not too high that you never allow any new investments in. No company, especially a small one, is perfect. They all have a wart or two or fifty, but warts can be removed. It’s why it’s important to stair step into a position and add as management executes and proves themselves. If they don’t execute you sell. Let their execution determine your position sizing, not some formula you read in a book.

I’m reminded by this quote I featured in The Art of Holding:

“The most successful investors I worked with, those who made the most money, all had one thing in common: the presence of a couple of big winners in their portfolios. Any approach that does not embrace the possibility of winning big is doomed.”

Lee Freeman-Shor

It’s not batting average that is important, it’s slugging percentage. You can have a lot of losers and still win big if you let your winners run and quickly kill your losers. What I tend to do over time is move more and more capital into my best performing management teams. For example, a large percentage of my portfolio is in four companies which I’ve owned for 1 year, 4 years, 5 years, and 7 years.

I also hold a handful of smaller positions that I hope will mature into what I think they can become. There tends to be a lot of turnover in my smaller positions. The smaller positions represent the minor-league prospects that I’m looking to bring up to the major leagues if they perform. Some will and some won’t. Management execution or lack thereof will decide their fate. It’s impossible to have the conviction at the beginning of an investment that you have at the end of a successful investment. Conviction, just like trust, takes time to develop.

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Comments 1

  1. It is interesting to me that two statements, one by you Ian, and one by Freeman-Shor, contradict each other:

    Each investor’s strategy is and likely should be different from the next person. It’s good to be different.

    and

    “Any approach that does not embrace the possibility of winning big is doomed.”

    Renaissance Technologies, RenTech, has perhaps the best record of any portfolio manager over the last thirty years. Computers execute their trades based on statistical analysis of millions of past trades with similar characteristics, and an emphasis on minimizing risk and maximizing leverage. In a convoluted kind of way, Buffett follows a similar structure, minimize risk (over the long term), maximize leverage (Buffett does it with insurance float, although many will say, and rightly so, his huge cash positions tend to offset that).

    There’s a great talk on this subject on Chat with Traders:

    https://chatwithtraders.com/ep-142-bert-mouler/

    Specifically, I’m referring to the section when Mouler consults with a quant hedge fund, and he’s looking at their lackluster results, and he asks them something that appears on the surface to be ridiculous, (something like have you tried just buying on Mondays and just selling on Tuesdays?) and they respond that that can’t possibly work, he knows that they are already sunk. He is, I think, exagerating to say, untested assumptions inhibit investment returns.

    When everyone assumes something will work, and assume something else won’t work, without testing, they are defeating themselves right out of the gate.

    Here’s my tested assumption. Good businesses (growing sales, improving margins, low debt) out perform, over time, lousy but cheap businesses (shrinking sales, declining margins, lots of debt). On the other hand, I’ve met highly-successful investors who just buy those lousy but cheap businesses if they can buy enough to influence events. Or those who invest when they see a successful activist investor or new management.

    I guess what I’m saying is untested preconceptions or assumptions are problematic in the market.

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