Never Swing For The Fence – Wealth Is Built By Hitting Singles

There is a common belief among investors that the secret to building wealth lies in your ability (or your advisor’s ability) to hit home runs with your investing – and it is complete nonsense.  I’m not exactly sure who started this myth, but I know that it has been kept alive by some in the investment industry.

Sure, some stocks (or mutual funds) do very well and get a lot of attention.  There are examples of stocks that increase significantly in a short period of time, like tripling in a year.   Imagine if you bought Research In Motion a few years ago.    If you got in on the ground floor, a thousand dollar investment would become a small fortune in a hurry.

Hitting these ‘home runs’ looks very enticing and people like to dream.  It’s the reason the lotto 6/49 is so popular; a $1 investment might become $10,000,000 – or more.

My wife Kathy had never been to Las Vegas.   When we found out she was pregnant with our first child, we decided to go.  It was a now or never (or at least not for a long time) kind of thing.   I wanted to show her all the glitz and lights; she loved it.

I hate gambling – I don’t get it.  My thinking is that the odds are always against you and it’s designed for you to lose.   If you want to play, and you can afford to lose, go ahead, have a blast; but if you believe you are going to strike it rich, think again. Casinos are brilliant in how they make people believe that they can strike it rich.

Kathy saw the big colorful electronic sign over the progressive slots that read: $37,972,664 (and counting). She asked me, “What does that mean.”  I explained, ‘that’s how much you can win if you hit the jack-pot.”  She asked, “Do these people really believe that they are going to win?”  Every machine was busy with someone dumping their hard earned money into it.  If they didn’t think they could win, why were they there wasting their money?

Casinos use human psychology to maximize profits – and so does the investment industry.

People want to chase the big prize, the big payoff, the dream.  The problem is that too many people are chasing the dream with their retirement savings.

It’s called The Home Run Fallacy.  There’s a belief that building wealth and winning the financial game lies in one’s ability to hit home runs.  People want the big prize – and they want it now.  The financial industry is all too happy to let investors believe that the big prize is out there to be won.  They are all too happy to feed people’s dream of striking it rich.

The truth is that building wealth in the stock market comes from hitting lots of singles and the occasional double, not from hitting home runs.  Barry Bonds, the all time home run leader had more than twice as many strike outs than home runs.  When you swing for the fence, you have a greater chance of striking out.  When you strike out in baseball, you’ll get another try at bat later in the game.  When you strike out investing, you go broke.