In baseball, a batter who watches three pitches go past just inside the strike zone will be called out by the umpire. Also, as many baseball fans know, the strike zone from one umpire to the next can be a different size. Baseball players thus often have an incentive to swing at pitches they would rather not, out of fear of being called out.
Many investors, especially professional money managers, think about investing like it's a baseball game. Because they aim to beat the indexes they are being scored against, professional money managers feel a lot of pressure to get base hits, doubles, triples, and home runs in order to earn their keep. Out of fear of being "called out," they might swing at pitches that may be just inside the strike zone, even though they may prefer to watch those pitches go by. In other words, investors often forget their valuation discipline and think about investing like it's a baseball game--three called strikes and you're out. So they swing away.
But what if the rules of baseball were different? What if a batter could watch any number of pitches go by, waiting for the perfect "fat pitch" to come along before swinging? Baseball will never adopt this rule, of course--games would last too long and pitchers would bemoan their escalating eras. But as an investor, you can (and should) play by these rules.
You can significantly raise your investment batting average by waiting for the pitcher--Mr. Market--to throw you a nice fat pitch right down the middle of the strike zone. Unless the market throws a pitch that you're very confident in swinging at, you can stand by and watch strike after strike be thrown without worrying about being called out, because, unlike in baseball, there is no penalty for being patient in investing. With the market pitching, you can let as many curveballs, knuckleballs, and sliders go by as you like until you see the one you want to hit.
The fat-pitch strategy that we have developed here at Morningstar has five parts:
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