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Waiting for the Right Pitch

There are a number of people Warren Buffett admires. Benjamin Graham and Phil Fisher are two folks who had a huge influence on Buffett. Buffett has been quoted as saying that he’s “85% Graham and 15% Fisher”. Other than Ben and Fisher, there’s someone else who had a huge influence on Buffett’s investing career. He’s none other than the late Ted Williams, a former Boston Red Sox player. Buffett even has a rare photo from Williams’ first game with the Red Sox in his office in Ohama. So, what’s so special about this sportsman?

In his book, The Science of Hitting, Ted Williams mentioned a key philosophy that makes all the difference between spectacular losses and significant gains. It is the concept of being patient and waiting for the right opportunity.

Buffett once proclaimed, “The most important thing in investing is what Williams said was the most important thing in hitting — waiting for the right pitch. You can watch pitches come in one inch above or one inch below your navel, and you don’t have to swing. No umpire is going to call you out. You can wait for the pitch you want.”

Every day, without fail, the stock market throws prices of various businesses at you. You can either let it pass if you think the price is high (business is overvalued) or swing your bat if you deem the price is low (business is undervalued). It is your decision, after all.

Component stocks of the Straits Times Index (SGX: ^STI) such as Keppel Corporation (SGX: BN4) and Singapore Exchange (SGX: S68) are currently going at an approximate price-to-earnings (PE) ratio of 10 and 20 and at prices of S$10.52 and S$6.71 respectively.  If you deem the businesses are overvalued, you can patiently wait for the right pitch and let the prices whizz past you. However, if you deem the valuations are just about right, you may want to take a swing.

Sometimes you may feel that a business you like may not come down to a valuation so low and to just swing your bat anyway, even if the business is overvalued. Swinging your bat in such instances may cause you to lose money unnecessarily. Do remember that valuations indeed fall like a cliff during economic recession and/or during black swan events. A case in point is the resilient business of Raffles Medical (SGX: R01). It fell to a PE of close to 16 and at a price of S$0.56, during the depths of the financial crisis in 2008/2009.  Currently, it’s trading a PE of 21 and at a price of S$3.18.

Patient Capital Management’s Vito Maida follows the philosophy of Williams as well. He once said, “The ability to patiently wait for the perfect pitch and the purchase of high quality business at a substantial discount to their true economic worth greatly increases our batting average. We are in effect swinging at a very large beach ball with a very large bat; we want to make the easy hit.”

Meanwhile, the best thing while seeing prices zoom past you is to sock up cash in the bank, waiting to be unloaded during a downturn. When the downturn indeed arrives, we must not be paralysed by fear to squeeze the trigger.

Just like how a baseball player is a superstar if he strikes the ball safely only 33% of the time, you do not have to take a swing at your favourite business at every instance you get. To invest right, you have to wait for the right pitch and wait for the right deal. Patience is the name of the game.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.