Home run hitters, like football quarterbacks or basketball centers, often get a big chunk of fan attention. Long-ball hitters have the ability to change the game with one swing of the bat. Of course, many Home Run Kings are also Strikeout Kings. Reggie Jackson, number 13 on the all-time home run hitters list (number 8 if we adjust for certain drug cheaters) with 563 career home runs, also struck out 2,597 times. But his homers made up for it. There's a reason he was called "Mr. October" during World Series games.
Investing is different than baseball, at least in the way we approach the game. Here a strikeout is defined as a permanent loss on an investment. Not a temporary "stock market" decline. You bought a stock, say Blockbuster Video back in the 1990s. Along came video-on-demand and Netflix, goodbye goes Blockbuster's business, and you sold it. At a big loss. In this case the math of losses is worse for you than the home run hitter who strikes out and walks back to the dugout cursing about the umpire. How so?
Unlike the baseball hitter who has only lost an opportunity, investment losses have the pernicious effect of requiring even greater percentage gains to get back to even. Say you lost 50% on your Blockbuster purchase. Now, to get back to your original investment you must earn 100% on the remaining capital. Not an easy prospect. And it gets worse as the losses deepen. Lose 80% on an investment? Now the required return is 400%, or four times the remaining capital. Good luck with that.
Investment styles are many, from consistent "singles" hitters who don't strike out much, to the home run hitter who bets big on longshot opportunities, hoping to find the next Apple, Google, Netflix, Wal-Mart or Costco. But who also strikes out a lot. And hitting home runs in the stock market, unlike baseball, is difficult and usually takes a very long time.
We prefer the baseball equivalent of singles, doubles, triples and the occasional home run. And we place a lot of importance on minimizing strikeouts, or permanent losses, given how difficult it is to dig your way out of these holes. We spend our time assessing the risk of permanent loss, which typically occurs from a loss of competitive strength or bankruptcy. Not simply because the stock market experienced a temporary decline.
So, the key to long-term investment success is to keep permanent losses to a minimum. With more of your capital intact, you don't have to work as hard to move the ball forward. And you shouldn't find yourself walking back to the investment dugout muttering to yourself about the crazy stock market "umpire" who called strike three on you.