As a kid playing baseball, I loved “fat pitches.”
It’s a term popularized by the late and great Ted Williams, left fielder for the Boston Red Sox. He’s widely recognized as one of the greatest hitters ever – an honor he won in part by waiting for pitches to come into the “strike zone.”
Basically, Williams only swung when it was worth it. Even as a Little Leaguer, I took that to heart. It just seemed like smart baseball to me.
Source: Brad Thomas
I always excelled at sports growing up. Even at such an early age, I knew that one of the best ways to win at anything – sports, jobs, or life in general – is to outwork the competition.
Outwork and outsmart. So while everyone else would swing at whatever came their way, I analyzed each throw, helping me earn the title of “Home Run King.”
Several decades later, I now recognize how well that practice works in investing, too. And I have Charlie Munger and Warren Buffett to thank for that.
Charlie Munger, Warren Buffett’s late, long-term business partner, actually cited Ted Williams in his 2005 book, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger. And Buffett himself went on to reference the concept of choosing your swings in 2017:
The trick in investing is just to sit there and watch pitch after pitch go by, and wait for the one right in your sweet spot. And if people are yelling, “Swing, you bum!,” ignore them.
By waiting for investment fat pitches instead of wasting your time, money, hopes, and dreams on less likely swings… you increase your odds of success.
The Genius of Warren Buffett
I told you in my last two articles that I had more to write about Warren Buffett this week. Saturday’s annual Berkshire Hathaway (BRK-A)(BRK-B) shareholder meeting was filled with fascinating takeaways from start to finish.
But the big news, obviously, was Buffett’s announcement that he will be stepping down at year end.
on Monday, I said I disagreed with how Buffett handled his succession plans. And on Tuesday, I pointed out how Buffett missed the value proposition from several high-quality real estate investment trusts.
But I also wrote how much I’d like to meet him someday:
My regular readers know how much I respect him. My company name, Wide Moat Research, is even based on his words of wisdom.
Buffett really does have a lot of wisdom to share, including about those fat pitches. That was another topic that came up in the shareholder meeting.
One of the questions he got was from Advate Prasad, a shareholder in New York. He noted how:
Today, Berkshire holds over $300 billion in cash and short-term investments, representing about 27% of total assets, a historically high figure compared to the 13% average over the last 25 years… Beyond the need for liquidity to meet insurance obligations, is the decision to raise cash primarily a de-risking strategy in response to high market valuations?
This was then coupled with a question from fellow shareholder Mike Conway, who asked if Berkshire expected to “see some fat pitches coming” his way.
Buffett’s response was phenomenal:
We would spend $100 billion if something is offered that makes sense to us, that we understand offers good value, and where we don’t worry about losing money. The problem with the investment business is that things don’t come along in an orderly fashion, and they never will.
That and, “We have made a lot of money by not wanting to be fully invested at all times.”
When you keep those two principles at the forefront of your mind – only buying when the opportunity is right and keeping cash on the side to act on when true bargains come along – you’re in the best kind of position to profit in the long term.
That’s how Buffett and Berkshire did it. And every individual investor can do the same.
The Proof Is in the Profits
I can’t promise you’ll retire with Buffett-level wealth. He is, after all, one of the richest men the world over.
But this fat-pitch method does work, as experience after experience has proven. I’ve seen it personally with stocks like Broadcom (AVGO), a leading player in communication chips, custom AI chips, and enterprise software industries.
We originally bought it in March 2020 at a split-adjusted $20 per share. At the time, AVGO was trading with a price-to-earnings (P/E) ratio in the low teens – well below its long-term average in the 15 times range.
Yet despite all the early COVID fears the stock market faced, this company was growing quite nicely. In 2019, AVGO raised its dividend by 22.6%. And in 2020, it hiked that payout again by 10.8%.
AVGO was a fat pitch. And we took a swing.
In fact, throughout our entire holding period, AVGO continued to grow its earnings consistently.
Since we also saw its multiple expand up above the 30 times range… more than twice the valuation we originally paid… we ultimately sold it for a return of 677%.
All because we kept money set aside for the “perfect” pitch.
Wide Moat saw a similar story in home improvement titan Lowe’s (LOW). Once again, we bought it in March 2020 while most other investors were panicking.
We recognized that this company’s average P/E ratio was 19.8 times for years and years. Yet that valuation had dropped to about 11 times when we bought it.
The only other time we’d seen it trade so low was during the Financial Crisis. And guess what? It bounced back from there just like we knew it would.
Lowe’s has been around for decades. Moreover, it has increased its annual dividend for 61 consecutive years. So when we saw it trading so low five years ago, we recognized it for the fat pitch it was.
As of today, we’re up by nearly 240% with the position in our Wide Moat Letter. And there’s every indication Lowe’s can continue to grow and compound from here.
That’s what it means to wait for a fat pitch. That’s how Buffett did it. That’s what we try to emulate in our Wide Moat Letter.
If those perfect conditions aren’t there, you save your cash until the time is right. Because you know a real fat pitch is well worth the wait.
Regards,
Brad Thomas
Editor, Wide Moat Daily
PS: Tune into our YouTube channel tomorrow where Nick Ward and I will be discussing a few of Warren Buffett’s fat pitch success stories.
MAILBAG
What are some other life lessons that have helped you in your investing journey? Write us at feedback@widemoatresearch.com.