Yesterday we talked about “Four Lessons From the Mad Genius.” Today we’ll talk about the final thing I learned from Ken Heebner -- the value of “small ball vs. long ball.”
I first wrote about this a few years back, but the lessons is so important I think it’s worth sharing again. First, I’ll tell you what the terms mean, and then explain their relevance to investing.
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Two Styles of Play
Small ball and long ball started out as baseball terms. They refer to two different styles of play on the field. They later became poker terms, thanks to their adoption by noted Texas Hold ‘Em pros.
“Small ball,” as you can probably guess, refers to a careful, tactical, conservative style of play. Small ball is about grinding it out... not going for the glory, just taking calculated risks.
On the baseball field, small ball means looking for singles, drawing walks and winning the game inch by inch. At the poker table, small ball means avoiding risky confrontations... using strategy and tactics to risk small amounts and win small amounts, slowly building the chip stack over time.
Above all, small ball is about caution and technical proficiency.
Long ball, in contrast, is all about the big, bruising home-run game. Long ball is swinging for the fences... trying to crush it every time... looking to knock the cover off the ball.
The great long ball player of legend is Babe Ruth. The Babe’s theory was, “Every strike brings me closer to the next home run.” When asked how he dealt with a slump, Ruth told reporters, “I just keep goin’ up there and keep swingin’ at ‘em.”
In No Limit Hold ‘Em, long ball is all about big pots and big confrontations. This is the type of poker you see immortalized on TV, when testosterone-charged players shove huge stacks of chips in the middle, as they say, “all in.”
Know and Use Both
So what does this have to do with trading and investing? The bottom line is this: To earn truly superior returns over time, you have to understand the difference between small ball and long ball... and you have to be good at both.
As Heebner reminds us, huge outperformance comes from first concentrating your knowledge, and then concentrating your positions. Most of the other investing greats understand this, too.
Consider this quote from Ralph Wanger, dubbed “the dean of small-cap investing” for his stellar long-term returns: “I had always thought that to be a good investor you needed to hit a lot of singles and not strike out often. I was wrong. Investing, especially in small companies, is a home-run hitter's game.”
That’s the long-ball lesson in a nutshell. And when Warren Buffett puts 25% of his portfolio into one stock -- as he has done in the past -- he's very much playing long ball, too. (Few people realize how aggressive Buffett was in the early days.)
But the thing is, home-run opportunities don’t come along every day... just like fat fastball pitches down the middle don’t show up at every game. (Let alone every at bat). Sometimes the big-bet opportunities are thin on the ground for long stretches... and that’s where small ball comes in.
Jockeying for position
As an investor, it’s essential to be good at small ball for a few reasons. First of all, pure long-ball players tend to have a lot of trouble when the markets are choppy or quiet. Because they don’t know how to play small ball, they get bored or impatient, and then bad things happen.
This is a constant occurrence at the poker table, too. An out-of-town player gets sick of waiting around for a good situation to arise, and so he tries to force it... and pretty soon a third of his chips are gone. Or he starts taking home-run swings with marginal hands, and before long his whole stack is in someone else’s hands.
A lot of small-ball play is about jockeying for position. At the poker table this is fairly obvious -- the clear thing to do is be careful (and keep the pots small) until you wake up with a big opportunity or a big hand. Who wants to play small ball with pocket aces, or better yet, an open-ended straight flush draw?
But when you think about it, the jockeying for position idea applies in baseball, too. If the other team is sharp and on point and the pitcher is fresh, there may not be an opportunity to push hard and score a bunch of runs. But if the pitcher gets tired, or a sudden window of momentum opens up... that’s the time to pour it on.
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The average investor gets in trouble because he (or she) doesn’t understand these concepts. He doesn’t see that most of the time, it’s good to go for singles, keeping the risk low and the pots small.
But the average investor also doesn’t see that sometimes you have to swing from the heels... that investing is a home-run hitter’s game, as Ralph Wanger says.
So how to apply this in your day-to-day trading and investing life?
Grind It Out... But Swing Hard When the Time Is Right
Remember, first of all, that most of the time your focus will be on “grinding it out” -- using skill and technical proficiency to build small but respectable gains. It’s true that the market serves up opportunities on a semi-regular basis. But the vast majority of these are small-ball opportunities and should be treated as such. Keep your risk small, don’t get greedy, and look for a steady uptick of profits over time.
But then remember, too, that investing is a home-run hitter’s game.... and that every once in a while you want to swing from the heels, as virtually all the investing greats have done. A lot of the patient small-ball play -- be it in baseball, poker or markets -- is jockeying for position, waiting for those huge outsized opportunities to arise.
Warm Regards,
JL
