This article originally published in The Northern Daily Leader on 29 March 2014.
The sporting world makes a significant contribution to the English language. Sporting terms and phrases form an evocative part of our everyday vocabulary. You can almost have an entire conversation using just sporting analogies: “How was your day today?” – “A little bit below par really (golf). I had a boring meeting with Dave from Accounts; you know him, the guy with the attractive girlfriend – he’s really punching above his weight (boxing). But the day ended well, I gave a sales presentation and knocked it out of the park (baseball).” And speaking of baseball, it was Warren Buffett, acknowledged as one of the most astute investors of all time, who had some insightful investing advice when he said “You don’t have to swing at every pitch”. What Warren was saying was that you don’t have to buy every company you come across. The market will ‘pitch’ an infinite number of companies at you, but you needn’t feel that every one of them is a buying opportunity. Choose what to buy carefully and you are more likely to be buying the right companies and not the wrong ones.
In fact, it’s arguable that what you don’t buy is more important than what you do buy. Just one HIH, OneTel, ABC Learning or Poseidon Nickel can wipe out all the hard-earned gains from success stories like Ramsay Healthcare, Commonwealth Bank or Flight Centre. More than half the battle is won if you can avoid adding the inevitable disasters to your portfolio. Outright fraud or theft are difficult to predict, but the usual suspects of too much debt, empire-building and structural change are easier to spot. Empire-building and too much debt often go hand in hand, as the empire is usually largely debt-funded. It’s one big party when the money is cheap and easy, but nothing unravels faster than an over-leveraged business that loses the support of its bankers. Just ask Nathan Tinkler or Eddy Groves. Structural change is less exciting and usually a lot slower, but produces the same results. Yahoo!, Holden and just about every manufacturing business in Australia are examples of the impact of structural change. Businesses can and do change and innovate, but the new business is often just a shadow of the first. Like the proverbial frog in a pot of slow boiling water, structural change can have a slow and almost imperceptible impact on a business, but the results can be just as fatal. So next time you’re thinking about having a ‘swing’, ask yourself if it’s going to be a home-run, or just another strike on your investing record?