Being a 9-inning investor
I’ve often used a baseball analogy to emphasize the importance of staying focused on the longer term outcome as a capital markets investor. Every investor begins with the belief that the outcome will be positive but sometimes it is easy to lose faith when the account value is declining. This is especially true without the benefit of past experience with declines and recoveries. I like to think that each year of investing is like an inning in a baseball game. Can a team lose the first few innings and still win the game? Sure, it happens quite often. In fact, it’s rare that the winning team does so without losing a few innings. If a team becomes discouraged after losing an inning or two and forfeits the game, the loss becomes permanent on their record. In baseball, that would make no sense. Does it make any more sense for investors?
Let’s let history provide the answer. Since 1926, there have been 80- nine year rolling periods (i.e. 1926-1934, 1927-1935, 1928-1936… 2006-2014). Of the 80 periods, only four have ended with an overall loss for a U.S. stock1 investor. The results2 of those years were:
- 1929-1937 = (.90%) annualized loss
- 1930-1938 = (.10%) annualized loss
- 1999-2007 = (1.40%) annualized loss
- 2000-2008 = (.90%) annualized loss
Again, if we look at each nine year rolling period as a complete baseball game (each year representing one inning), the track record of success is solidly in the investors favor.
If baseball teams were guaranteed to win it would spoil the fun and there would be nobody to play against. I would argue, similarly, that if capital market investors were guaranteed a positive return the risk premium would be forfeited, defeating the purpose.
Capital market investments are not right for everyone but based on what we know thus far, for those who do decide to invest, it is important to stay focused on the long term game plan. Don’t forfeit the game because of periodic setbacks.
