Our 2014 Fredericksburg Business Insider sponsors
|Click here for information on sponsorships|
Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
Market rewards patient ‘hitters’
AS AN ARMY of investment bankers, lawyers and Federal Reserve officials huddled in New York City a week ago to work out an emergency bailout for Bear Stearns, I sat in a Spotsylvania County basement with 10 other men and drafted a fantasy baseball team.
On the surface, the two would seem to have little in common. One determined what level of panic would ensue when worldwide markets opened Monday morning. The other would merely decide who got bragging rights on our Yahoo league message board.
But in reality the two events had some similarities, which teach a lesson about investing.
The events surrounding Bear Stearns have been widely reported. The investment bank bet too big on mortgage-backed securities. When the securities tanked, the cash-strapped Bear was forced to accept a fire sale to J.P. Morgan Chase & Co.
Far less ink was spilled over the events in the Spotsylvania basement. But there, too, savvy and patient types won out over those who bet too big too early.
It was an auction-style draft. Each of 11 owners got $260 (not real money) to draft a team of 14 hitters and nine pitchers. Owners took turns throwing out a player’s name and then bidding on him. The best players, such as Alex Rodriguez, commanded salaries above $40, while lesser folks went for as little as $1.
At the beginning of the draft, as was true of investment banks during the housing boom, owners were flush with cash. It was easy to throw around money to scoop up your favorite players.
But then times got tough. People’s $260 dwindled down to double and then single digits. Many owners found themselves crippled by their lack of cash flow.
That’s when the savvy players, like J.P. Morgan, swooped in. They’d patiently held on to their money early on, refusing to pay inflated prices. Once their competition was crippled, these vulture-like owners paid a pittance for some fantastic talent that remained.
Billionaire investor Warren Buffett has a number of pithy comments, but one of my favorites involves a punch card. He says that investors would be better off if they had to punch the card with every investment decision. After 20 punches, they couldn’t make any further investments.
Buffett says that would force investors to think carefully about every decision. It’s not a problem to let some borderline pitches go by without taking action. He says to carefully save your cash until you get that fat pitch, and then swing for the fences when others are fleeing in panic.
That’s what J.P. Morgan seems to have done with the Bear Stearns deal. And that’s what the smart owners did last week in the Spotsylvania basement.