Table of Contents

Batting Average

The 30-Second Summary

What is Batting Average? A Plain English Definition

Imagine you're at a baseball game. The announcer bellows, “Now batting, Ted Williams! The last player to hit .400!” What does that mean? It means that during his legendary 1941 season, Williams got a hit in 40% of his at-bats. He stepped up to the plate 10 times and, on average, succeeded 4 of those times. In the world of baseball, this is the pinnacle of consistent excellence. In investing, the Batting Average is the exact same concept, borrowed directly from the ballpark. It's a straightforward measure of your success rate: `Batting Average = (Number of Successful Investments / Total Number of Investments) x 100%` If you've made 10 investments in your life and 7 of them turned out to be profitable, your batting average is 70% (or .700). It’s a simple, honest scorecard for your investment decisions. But what counts as a “successful investment”? This is a crucial detail. It's not just about selling a stock for more than you paid. A true value investor defines success more rigorously. A success could be:

The key is to define your own criteria for a “win” before you start swinging. This metric isn't about bragging rights; it's about creating a feedback loop to improve your process. As the legendary investor Warren Buffett advises, discipline is everything.

“The difference between successful people and really successful people is that really successful people say no to almost everything.”

This quote perfectly captures the spirit of a high-batting-average investor. They don't swing at every pitch the market throws. They wait patiently for the one in their sweet spot—an understandable business, selling for a great price, with a clear margin_of_safety. By saying “no” to mediocre or speculative ideas, they dramatically increase the odds of getting a “hit” when they finally decide to invest.

Why It Matters to a Value Investor

For a trader chasing momentum or a venture capitalist funding startups, a low batting average is often part of the game. They might strike out nine times, hoping for one grand slam that pays for all their failures. A value investor plays a completely different sport. For us, the batting average is a vital sign of a healthy investment philosophy for several reasons:

How to Calculate and Interpret Batting Average

The Formula

The calculation itself is incredibly simple. The challenge lies in being honest and consistent with your definitions. Step 1: Define a “Total Investment” This is any time you commit capital to a specific, distinct investment thesis. If you buy shares in Company XYZ, that is one “at-bat.” Step 2: Define a “Successful Investment” This is the most critical step. You must set your criteria in advance. Here are a few options, from simple to more robust:

Step 3: Calculate the Average `Batting Average = (Total Number of “Successes” / Total Number of “At-Bats”) x 100%` Keep a simple investment journal or spreadsheet to track every decision. For each entry, note your thesis, your buy price, and later, the outcome and whether it qualified as a success based on your pre-defined criteria.

Interpreting the Result

So, you've calculated your number. What does it mean?

A Practical Example

Let's compare two hypothetical investors over five years to see how focusing on batting average leads to better results.

Investor Profile Disciplined Diane (Value Investor) Speculative Sam (Momentum Chaser)
Investment Strategy Waits for “fat pitches” within her circle of competence, demanding a margin of safety. Chases hot stocks and market rumors, hoping for quick, large gains.
Total Investments (At-Bats) 10 10
Successful Investments (Hits) 7 3
Unsuccessful Investments (Strikeouts) 3 1) 7 2)
Batting Average 7 / 10 = .700 (70%) 3 / 10 = .300 (30%)
Key Outcome Diane's winners are consistently solid (e.g., +40%, +60%). Her one loss is small (-15%) because she cut it when her thesis broke. Her overall portfolio grows steadily and safely. Sam has one massive winner (+500%) that he talks about at parties. However, his seven losers (-50%, -70%, -100%) devastate his capital. His one homerun isn't enough to make up for all the strikeouts.

The Takeaway: Diane's focus on a high batting average—on not striking out—builds sustainable wealth. Sam's focus on hitting homeruns leads to a thrilling ride but, ultimately, a portfolio in ruins. Diane understands that the foundation of great returns is the preservation of capital.

Advantages and Limitations

Strengths

Weaknesses & Common Pitfalls

1)
One small loss, two break-even
2)
Several large losses, two went to zero