In The Science of Hitting, baseball hall-of-famer Ted Williams revealed his approach to being a great hitter. And when a guy with a lifetime batting average of .344 and 521 home runs wants to tell you his secrets, it pays to listen.
Williams' approach was amazingly simple:
- Get a good ball to hit
- Proper thinking
- Be quick with the bat
To determine what makes "a good ball," Williams dissected the location of various pitches to figure out which ones gave him the best opportunity to get a hit. For example, the best he could hope to hit with low and away pitches was a meager .230 -- while pitches straight down the middle gave him the chance to hit .400 (which he did in 1941).
Essentially, the pitches he chose to swing at could either send him down to the minors -- or vault him into the Hall of Fame.
And the same is true for you.
Get a good ball to hit
As investors, the difference between beating and lagging the market over the long run comes down to:
- Finding great companies at great prices
- Doing your homework
- Making timely decisions
In other words, swinging at the investments that are the most likely to bring you big returns.
It seems obvious, but all too often we ignore this simple code and swing at overvalued stocks -- and in doing so, we reduce the chances of market-beating performance.
But when the market is panicking, we're presented with better opportunities to hit home runs.
Proper thinking
Tom and David Gardner follow the same philosophy -- good companies at great prices -- and it's paid off.
From April 2002 to May 2003, for example, they picked 24 stocks for Motley Fool Stock Advisor subscribers. Fully 23 of them have positive returns, including big winners such as Marvel (NYSE:MVL), up 829%, and Amazon.com (NASDAQ:AMZN), up 334%.
All 23 were already great companies -- but the dreary bear market environment allowed Tom and David to swing at these fat pitches and pick up great businesses at great prices.
Making timely decisions
These days we're presented with what Ron Muhlenkamp recently called "the best investment values we've seen in a decade." In other words, we're getting better pitches to swing at than we were in previous years.
One of the screens that Muhlenkamp uses to determine value opportunities is looks for companies generating return-on-equity figures above 15%, and price-to-earnings ratios below that figure.
Here's a sample list:
|
Company |
P/E Ratio |
ROE |
|---|---|---|
|
Goldman Sachs (NYSE:GS) |
8.7 |
23% |
|
US Bancorp (NYSE:USB) |
11.8 |
19% |
|
Home Depot (NYSE:HD) |
11.6 |
17% |
|
Hewlett-Packard (NYSE:HPQ) |
14.1 |
22% |
|
Bed Bath & Beyond (NASDAQ:BBBY) |
14.4 |
21% |
*Source: Capital IQ, a division of Standard & Poor's.
Using this measure, at least, we can see that there are plenty of good companies out there trading below the market's average P/E. That's reason enough for further research.
Foolish bottom line
We live in interesting market times. It can be a bit nerve-wracking to put money to work when others are pulling it out -- but those exact types of markets offer the best chance to build strong long-term gains.
If you'd like help finding great companies trading at great prices, a free 30-day trial to Stock Advisor is yours by clicking here. Tom and David have a pretty good track record in bad markets, to say the least. Since 2002, their picks have outperformed the market by nearly 38 percentage points on average. There's no obligation to subscribe, so what do you have to lose?
Todd Wenning wishes he could have hit like Teddy Ballgame just one time. He does not own shares of any company mentioned. US Bancorp is a Motley Fool Income Investor recommendation. Home Depot and Bed Bath & Beyond are Inside Value picks. Marvel Entertainment, Bed Bath & Beyond, and Amazon.com are Stock Advisor picks. The Motley Fool owns shares of Bed Bath & Beyond. The Fool's disclosure policy is legendary.
