By Daniel A. Barnes

It’s baseball season. I’m at Buckeye Field. It’s the second inning: no score, no outs, man on first and second. My son is at the plate, and he’s ahead in the count: 3 balls and 1 strike. The coach yells, “Don’t give him anything!” I smile. The good thing about being ahead with a 3-1 count is that the pitcher must throw you a strike. If he doesn’t, the batter takes a base. Being forced to throw a strike, the pitcher has to throw the ball in a spot that is a lot easier to hit. Unless his “stuff” is really good, the odds are that the ball he throws will be a “fat” pitch, a pitch that’s easy to hit. Well, here comes the pitch, and it’s right down the middle. Jonathan slams it over second base for an RBI single, igniting a seven-run inning for the Cubs.

Just as batters need to exercise patience and wait for the pitch when the odds are in their favor, money managers should exercise similar patience when choosing investments for their clients.

Money managers must wait for the pitch (investment) when the odds (count) is in their favor. That means they shouldn’t buy risk investments (equities), when prices are not very attractive.

Sometimes prices in an asset class are low. When they are, pessimism abounds (think the 1970s). At other times, such as in the second half of the 1990s, a feeling of “good times” prevails. In those times, it’s probably not a great time to make risky investments. You see, the primary determinant of the performance of an asset class (stocks, bonds, real estate) is the price you pay for it. Today, with stocks up 60 percent from a year ago, prices are less attractive than they were only recently.

Money managers look to certain measures to tell the overall health of the market. Standard & Poor’s 500 Index (SP500) is one of them. It’s an index of 500 of the most widely held common stocks on the New York Stock Exchange (NYSE).

The SP500 is now 1165. Do you know where it closed at the end of 1998? 1232. In other words, SP500 stocks are down five percent over the last 12 years. While the dividends have made you about two percent annually, you would have made more if you were in cash instead stocks over the last 12 years — despite stocks’ 60 percent rise since last year.

Investing in the buoyant Clinton era yielded a negative return. Why? Because the price you paid was too high.

At Barnes Capital, we endeavor to never forget that good pitches yield better returns, so we remain vigilant in exercising patience while we stand at the plate, with other people’s money, and wait for pitches where the odds are in our (and your) favor.

To talk more about baseball analogies, your portfolio or your dreams, call me at 925-284-3503.

Looking forward to baseball season,
Daniel A Barnes, CFA

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Thursday, April 1st, 2010 at 7:51 pm and is filed under Monthly Column. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.