Investing lessons from the Boston (Red Sox) Massacre of '06

Posted by: Aaron Pressman on August 22, 2006

I was more than a little bleary-eyed yesterday at work after spending some six hours at Fenway Park on Sunday night and Monday morning watching game four of the five game Yankees sweep of the Red Sox in what’s becoming known around these parts as the Boston Massacre II (Credit for the above photo goes to the Boston Dirt Dogs site). Version I was in 1978 - don’t ask. To the many depressed Red Sox fans in need of some silver lining, and to take the minds of Yankee fans off their gloating, here are five investment lessons from the Boston Massacre 2006 edition.

1. Look for holes in your portfolio and fill them before it’s too late.
Among the best Yankee batters are lefties Jason Giambi, Robinson Cano, Bobby Abreu and Johnny Damon plus switch hitter Jorge Posada who is better against right-handed pitchers. Obviously if you’re the Red Sox and you play the Yanks 19 times a year, you need some good leftie pitchers, especially in the bullpen. Sadly for the Old Towne team, they had none and the bullpen was crushed repeatedly.
You can take the same approach when you review your portfolio for holes. An income-oriented investor depending mostly on fixed-rate bonds is vulnerable to inflation and should probably mix in some TIPS and maybe dividend-paying stocks and REITs. A stock investor heavy on retailers, energy and tech is vulnerable to a consumer spending slowdown and should probably look at boosting exposure to health care, consumer durables and so on.

2. Nothing lasts forever and sometimes a favorite stocks has to go.
For the past couple of years, Sox fans have been able to relax when middle reliever Mike Timlin entered a game. As set-up man first for closer Keith Foulke and this year for rookie closer Jonathan Papelbon, Timlin was a reliable if aging pitcher to get through the eighth inning of a close game. But no more. Timlin (who is one month older than me) has been positively awful since coming back from the disabled list in June. But with a slim 2-run lead on Sunday night (or was it already Monday?) in the eighth, and closer Papelbon well rested, manager Terry Francona still brought in Timlin. The result? Timlin faced two men, both got on, and one scored. Papelbon came in too late. Oy.
There’s the same tendency to become emotionally attached to once great stocks. How many investors have held onto multi-year losers like Kodak (EK) or Clear Channel (CCU) hoping for the turn-around that’s just around the corner? Academics have found that individual investors tend to sell their winners too soon and hold their losers too long. It may be time to review your portfolio with an unemotional eye.

3. Don't go for every investment pitch that comes your way.
It's been the Yankees strategy for some years now to wear down top starting pitchers with great plate discipline. Starters get worn out by throwing so many pitches and either get tired or are replaced by less-intimidating relievers. Some of Derek Jeter and Bobby Abreu's at-bats in Sunday's game seemed to last forever.
Similarly, with the plethora of stock screens and stock picks and stock lists published every day, you have to be selective to stay out of trouble. It's fine to use such lists for generating possible investment ideas but do your homework.

4. Keep your expectations in check to avoid risky or foolish moves.
The Red Sox entered the series with their opening day catcher and right fielder out because of injuries along with two of the five original starting pitchers. The opening day closer was long out of his job and returning from injuries and two of the highest paid bullpen additions for the year had become expensive flops. Thanks to a weak schedule and some great rookie contributions, they did well but glaring weaknesses were already obvious well before the Yanks came to town, i.e. being swept by the Kansas City Royals. In that light, it's no surprise that the team held onto its young talent at the trading deadline. This wasn't a group that was just one or two players away from a championship.
During the 1990s, some investors got used to double-digit annual stock market returns. In an earlier decade, investors got used to double-digit bond yields. But markets changed and those who kept chasing the hottest stocks or highest yields eventually got burned. Over long periods of time, even the best fund managers beat the market by only a few percentage points a year.

5. Stick with the percentages even when it's not popular
Joe Torre probably won't win manager of the year but he's worthy of consideration. In the bottom of the ninth inning of Sunday's game, with the score tied, David Ortiz hit a lead-off double and Torre called for an intentional walk for Manny Ramirez. The move paid off when the Yanks were able to get Ortiz out on a force play at third. Then after a passed ball turned first and second into second and third, he called for another intentional pass to Mike Lowell amid a crescendo of boos. The next two batters were easy outs and the Yanks won in the 10th inning.
Investors get buffeted with the wisdom of crowds as well and it can pay off to ignore the hordes and stick with a smart strategy. One of the most obvious examples, of course, was the Internet bubble. Those who stayed diversified took a much smaller hit than those who went for the home run of an all-bubble portfolio. Some academics call diversification the only free lunch in economics because it works.