In their latest episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss Investing Lessons From The Science of Hitting. Here’s an excerpt from the episode:
Jake: All right. This one’s hopefully a little bit more fun than the normal veggies. Almost, we can hardly call it veggies, but as you guys know, I have a couple of boys that are very into baseball. They are on travel comp teams. I spend most evenings and all the weekends pretty much at the baseball field. Yeah, let’s think about all of the– Well, what are the crazy analogies that I can pull while I’m sitting around here coaching for space. I recently read, actually read instead of just talking about reading it, The Science of Hitting by Ted Williams.
A lot of people are familiar with that, because Buffett’s talked about it and he’s talked about the waiting for the fat pitch. By the way, shoutout to Alex for picking such a great name, The Science of Hitting. I think that was a homerun choice there.
Jake: I think everyone knows that the chart looks like a box in front of a batter that shows 77 ball sized cells that fit within the strike zone. Ted Williams figured out what his batting average was for, where a ball was pitched and if he hit it– he swung at it there, He realized that the pitches that were middle in on the plate for him were what he called his happy zone, that was where he made the best contact and he had the highest batting average. He had cells that were at 400, but the pitches that were down in a way for him, he batted like 230.
Therefore, to have a good batting average, he had to choose carefully, which pitches he decided to swing at. Buffett took that and made an analogy of investing, and that there’s no called third strike, and that he’s looking for pitches that are fat pitches in his happy zone.
He really correlated it to the circle of competence. Like the pitch that’s right in your spot is your circle of competence. But it turns out that there’s actually a lot more in the book than just that graphic that is famous from it.
What’s interesting is that, Williams was just a total fanatic about batting. He thought about every single little detail that you could even imagine. I love to read those kinds of books about people who are just maniacs about a particular subject and just to see how deep that they will go into something.
For instance, he knew that the batter’s box at Fenway was just a little bit off tilted, so that the back of it was a little bit lower. He felt he always hit well there, because he could drive off of that little bit of an incline. And conversely, he knew that at Kansas City, it was a little bit the other way. He felt he was always batting uphill and he told the groundskeeper about that like, “Hey, I don’t think your batter’s box is flat.” The groundskeeper then like, “Well, okay, it’s supposed to be flat.” He fixes it. Then, Williams hits two home runs that day and the groundskeeper almost gets fired for-[laughter]
Jake: -making that adjustment. He didn’t want to ever use a bat that had any chips in it or that was discolored, because he felt even that would potentially distract him from concentrating on swinging and hitting. He took his bats down to the post office to weigh them exactly, because that’s what they show up and they’d be whether it was a little different type of wood or where the cut came from and the tree. It would be different weights and he wanted it to be exact.
Another thing that was interesting was that, he talks about how if he added basically two inches around the outside of the strike zone. Let’s say that you’re swinging at a pitch that’s just a little bit outside of the strike zone, a pitcher’s pitch. You increase the target area total, then of what you’re responsible for is the strike zone from 4.2 square feet to 5.8 square feet, which is 37% increase then of plate that you have to cover. That’s a big difference to think that you’re going to be able to get out or to make a good swing on 37% more coverages is quite a bit to overcome.
All right, so, another thing is that, he was famous for using a very light bat and he used a 35-inch bat with a 33-ounce weight, which would then be a drop too that’s in baseball parlance. He used a light bat, because he believed that quickness of the bat was super important, because it allowed you to see the pitch for longer, and then decide, is it going to end up in the place that you want to take a swing at. A big heavy bat like Babe Ruth’s swung this, but just absolute– It was 54-ounce bat sometimes, which is ridiculous. But you have to really get going to swing that bat. You’re committed, you can’t see the pitches long to then decide is this the pitch that you want to swing at.
I think there’s a little bit of an analogy there with Buffett and being able to like he will wait until the last– He’s not going to go chasing, he doesn’t participate in auctions. He’s going to wait and then, he’s going to have a really quick bat when it does show up in his zone, he can make a decision in five minutes, whether he wants to do an acquisition. A lot of hitting is about anticipating what the pitcher is going to do. I think there’s an analogy for us there, where Williams wanted to make sure that he got a fastball to hit and he would take until he got the fastball that he wanted.
We similarly have to anticipate what the Mr. Market might throw at us. We have to always have an inventory of potential ideas that we would want to swing at, so that then, when they do show up, we’re ready to take our good swing, you don’t catch that ball right where we want it.
But if you’re waiting until Mr. Market throws something and then, you’re like, “Oh, okay, maybe I should look into this one and research it.” We are already behind and you’re not going to be starting your swing soon enough. The ball is going to get on you a little faster than it probably should and you just can’t expect as good a result.
Another thing that Williams talked about was like maximizing the amount of time that the bat is going through the zone and swinging on plane with from where the ball is coming in, so that you have the best chance of getting good clean contact.
I think the analogy for us there is that, it’s going to be really hard to bottom tick your purchases or top tick yourselves. But if you can have your bat in the zone for a long time, which might be like dollar cost averaging into a name and maybe trimming out of a name, maybe that gives you the best chance at making a good contact with an idea.
The next day, we’ll try on a transition. I’m going to add a little bit more to The Science of Hitting the book and talk about Joey Votto, who is the closest thing that we have to Ted Williams today. He’s a left-handed hitting first baseman for the Reds. His bible actually is The Science of Hitting.
He talks about it all the time, but it just should probably be no surprise. By the way, some of these numbers I’m going to talk about right now, I got from a YouTuber that my son likes to watch this guide called Foolish Baseball, who just dives into all these crazy numbers and talks about different players. This one is about in 2016, Joey Votto hit over 400 for a half of the season, which is the closest that anyone’s really gotten to hitting 400 since Ted Williams did it.
Bill: Better than Ichiro?
Jake: Well, other guys have done– Yeah, other guys have had that. But Ichiro, I think this is the most recent time that someone’s gotten hit that well for that long.
Bill: All right, I’d have to call fake news.
Hit Investing Line-Drives
Jake: Maybe. Let’s not ruin the story of the facts, Bill. Foolish Baseball’s talking about how Votto– There’s three things that are important to this equation. Number one is avoiding strikeouts. We can already imagine what the investment implications of that are.
Taking zeros, really painful, hard to overcome. Number two is called BABIP, which is batting average on balls in play. If you actually make contact with the ball and hit it somewhere between the lines in fair ball, what is your batting average when it is put in play?
It turns out that the typical batting average on a ball in play is about 300 and anywhere from 250 to 350 around is what you could expect on a ball that you put in play. Anything lower or higher than that is probably a fair amount of luck. Either bad luck if you’re below 250 or overly good luck if you’re above 350.
How the ball exits is a big deal on your BABIP. A ground ball that you hit in play has expected batting average in the majors of 2.39. 239 batting average on a ground ball that you hit. A line drive has a batting average of 685. It’s quite a bit higher if you can hit line drives. And a fly ball has a batting average of 207, which is obviously not that great.
But the part that you have to factor in in today’s game is that, the fly balls often turn into homeruns and that helps this idea of slugging percentage that some investors have talked about. They don’t care what their batting average is, they care what their slugging percentage is. They famously cite like George Soros, where he was wrong probably 70% of the time, but when he was right, he was very, very right and he bet big, and he had a huge slugging percentage that overcame that.
Well, I would argue that it’s really, really hard to have a high slugging percentage, and to be very, very right, and hit homeruns, like that. Only 12.7% of fly balls that are hit turned into homeruns. I don’t know what the exact investment numbers are. It probably depends on whether we’re talking about VC, which is I don’t know, maybe one in a hundred turn into a fly ball that turns into a home run.
Or, maybe in public markets, it’s a little bit higher some of those numbers. But I would say that, we should probably be, at least for me like, my takeaway from this is that, I want to hit investment line drives that have a high batting average, that are going to get on base a lot, and are unlikely maybe to have as many fly balls that turn into homeruns, and that’s okay.
I’m just going to take the home run and the fly ball out of the equation, and I’m going to hopefully take the week ground ball contact out of the equation, and just tried to hit line drives, and look for pitches that are that line drive swing that I could take. Maybe it’s different for everybody, because we all have our own circle of competence. But in my mind, that’s the model that I want to use.
Walk-Rates Improve Your Returns
One of the things that’s really important, too, is this idea of walk rate. Joey Votto has the highest on base percentage and the highest walk rate of any active player. It’s 16% of his at bats, he gets a walk. And Ted Williams has the highest of all time, which was 20.6. One in five at bats, Ted Williams was getting a walk. Why that’s so important is that, you’re taking then those bad outcomes of a ball in play that’s not hit real well.
This is how you get your average up as you don’t swing at bad pitches and therefore, you’re going to end up walking a lot. I think there’s implications for us as investors and like cash management, you’re going to end up walking a lot if you’re only waiting to swing good pitches. I would say looking at Berkshire’s cash balances over the years, you could say, “Shoot, that guy’s walking a lot.” There’re always tons of cash on the balance sheet, but then when he does swing, I think he’s hitting a lot of line drives.
The other thing, too, is that walk rate versus strikeouts. Ted Williams had probably the best season ever for anybody in 1941. 147 walks to only 27 strikeouts. That’s an absolutely insane season. Anyway, I think there’s just a lot of interesting analogies or at least I like it, because I’m a baseball fanatic, because my kids are so into it that I think that we might be able to take away in the investment front that might help us to hone in on like…
When you swing at a pitch, what are you trying to do with it? Are you trying to hit a fly ball home run, or are you trying to hit a line drive, or is it ground balls, are you trying to bunch your way on? There’re lots of different analogies that we can use. But know what you’re doing, know what pitch you’re looking for, and know what swing you’re trying to take on it.
Tobias: The pitches walk guys, do they intentionally walk guys all the time.
Jake: Yeah, and maybe, even more they pitch around guys. It’s a semi-intentional walk. You just won’t see a strike in the strike zone. If you swing at something, it’s going to be the pitchers pitch, because he’s not giving you anything to hit.
Tobias: Right. There was a girl in the softball, who was going for the record for the season. The homerun record for the season and she was– [crosstalk].
Jake: They just walked her.
Tobias: Yeah, they walked her.
Jake: Barry Bonds, 2004 season, I can’t remember what it was, but I think it was over 200 intentional walks. I don’t know maybe that’s not right, but whatever the number was, it was just the second-place person, if I remember was not even in the same galaxy as far as a number of intentional walks. We can’t pitch to this guy. He’s hitting a homerun every time he’s up.
Jake: He was chosen, right?
Bill: Barry Bonds career OPS is over one.
Jake: That’s pretty cool.
Bill: That means, every time he got to the plate, you could expect him to get at least one base. That’s crazy. Somehow that guy’s not in the Hall of Fame, because we all get upset about steroids, even though we all knew what was going on. Okay.[laughter]
Bill: So stupid.
Jake: I saw something that 2004 season, if a player went and got a single and a homerun every single game that they played, it would have been a comparable OPS to what he had for that 2004 season. It’s just insanity.
Bill: Yeah, dude. He is nuts. I didn’t realize Votto’s OPS is over 900. My man, Ichiro’s 770 something. So, more hits, less power.
Jake: Yeah. Votto’s legit. [crosstalk]
Bill: Also, get to the hall, though.
Jake: Yeah, I think that’s right.
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