Strike Rate

Strike Rate is a wonderfully simple concept borrowed from the world of sports that investors use to measure their success. Think of it as your investment batting average. It’s the percentage of your investments that turn out to be profitable ('winners') out of the total number of investments you've made. To calculate it, you simply take the number of winning trades and divide it by the total number of trades (winners + losers). For example, if you made 10 investments and 7 of them made money, your strike rate would be 70% (7 / 10). While it sounds like a straightforward measure of skill, a high strike rate doesn't automatically make you the next Warren Buffett. As we'll see, the size of your wins and losses is often far more important than the frequency of your wins. It's a useful metric for self-assessment, but it's only one piece of the much larger puzzle of successful investing.

A common trap for new investors is obsessing over their strike rate, aiming for 80% or 90% accuracy. It feels good to be right often! However, this can lead to a dangerous habit: cutting winners short to lock in a small gain while letting losers run in the hope they'll turn around. The result? A portfolio full of tiny wins and a few devastating losses that wipe out all the profits. This is where the strike rate's crucial partner, the Payoff Ratio, enters the stage. The payoff ratio measures your average win size against your average loss size. The magic happens when you combine these two metrics. Imagine two investors:

• Investor A (The Dabbler): Has a fantastic 80% strike rate. But for every $100 she wins, her average loss is $500. Her payoff ratio is a dismal 0.2 ($100 / $500).
• Investor B (The Patient Hunter): Only wins 40% of the time—a strike rate that might discourage many. But her average win is $1,000, and her average loss is just $200. Her payoff ratio is a powerful 5.0 ($1,000 / $200).

Despite being 'right' far less often, Investor B is crushing it. Her few big wins more than compensate for her more frequent, but smaller, losses. This illustrates a core principle of value investing: it’s not about being right all the time, but about being right when it counts.

For a value investor, the strike rate is less of a report card and more of a diagnostic tool. It helps you reflect on your decision-making process.

So, what number should you aim for? There's no single answer. The legendary fund manager Peter Lynch famously said that if you're good in the investment business, “you're right six times out of ten.” A 60% strike rate from one of the greatest investors of all time should be incredibly liberating! It tells us that even the best make losing investments. The key is that their winners vastly outperform their losers. This contrasts sharply with other strategies. A Venture Capital (VC) firm, for instance, might have a strike rate below 20%. They know that most of their startup investments will fail, but they're hunting for the one or two that will grow 100x or 1,000x and pay for all the others. This is an extreme example of the Power Law in action, where a tiny number of events account for the majority of the outcome.

Ultimately, your strike rate is an outcome metric. As a disciplined investor, your focus should be on the process. A good process involves:

• Thorough Fundamental Analysis to understand the business you're buying.
• Insisting on a Margin of Safety to protect your downside.
• Having the patience to wait for great opportunities rather than swinging at every pitch.

You can make a brilliant, well-researched investment that fails due to bad luck (a surprise pandemic, a new competitor). You can also make a foolish, speculative bet that gets lucky. Over the long run, however, a sound process will lead to a positive Expected Value on your investments. It tilts the odds in your favor, which will eventually be reflected in a healthy strike rate and, more importantly, a healthy portfolio. Don't chase a perfect record; chase a perfect process.