How Coach Ochiai Turned Chunichi into a Constantly Winning Army—Investing Also in the Skill of "Defense"
I read the book "Saibai" by former Chunichi Dragons manager Hiromitsu Ochiai. His thinking, which transformed Chunichi into a perennial winner as a manager, is full of implications for investing as well.
In particular, I was fond of the following wording.
Since I took the helm of the Chunichi Dragons, I have continued to pursue victories by focusing on the stability of defense centered on pitching. Because,pitchers can be calculated to some extent, but hitting power is a “fluid”thing, as it is said that after scoring 10 runs, it is not rare to fail to score even a single run the next day.
No matter how many powerful hitters you assemble, it is extremely difficult to win by hitting for long periods. That is why the path to victory is to push forward with pitching strength as a key strategy.
From the perspective of a batter by background, you might find this surprising, butthis is not my preference, but a choice for winning.
Hiromitsu Ochiai, "Saibai" — "Effort that avoids defeat leads to victory"
When I read this, I was struck. This way of thinking exactly matches the concept of value stock investing.
Investing cannot escape “luck”
In stock investing, many people are focused only onwhich stock will go up. However, whether it actually goes up inevitably involvesan element of luck.
Short-term stock prices are a “random walk” driven by human psychology, so predictions are extremely difficult.
As the horizon extends, fundamentals such as profits and financials tend to converge. However, even with these fundamentals, it is impossible to accurately predict what will happen in the future.
As represented by investments in IBMeven Warren Buffett is frequently forced to withdraw. Since most so-called professionals also make mistakes, we can leave aside ordinary investors’ expectations.
Control the runs scored against you
In professional baseball, hitting .300 is considered first-rate. This means that if you bat ten times, you are likely to be retired seven times. Ochiai’s use of the term "fluid" is understandable.
In investing as well,a company with strong growth might be considered a good outcome if three out of ten become giants. We must operate on the premise that not all stocks will succeed.
If you invest equally in ten companies,three double in value while the remaining seven stay flat, the portfolio return is 30%. Highly skilled investors may seem to pick many big winners, but the reality is something like this.
On the other hand, suppose three of the remaining seven fall to half their value. Then the portfolio return would drop to 15%.No matter how good the stock, if you don’t protect your downside, returns will shrink dramatically.
Using baseball as an analogy, even if you hit a lot and score 10 runs, if the pitcher is failing and you let in 11 runs, you lose. Moreover, it is not rare to fail to score even a single run the day after you score 10.
To win, you must reduce losses. Like baseball, reducing losses in investing is more reliably achievable than increasing gains.Value investing focuses on this “defense,” making it highly reliable and reproducible.
Techniques to become a consistently winning investor
To control losses, you must emphasize the following:
- Do not buy unstable companies
- Do not buy companies with excessively high stock prices
- Cut losses appropriately on bad companies
In a roaring market, you tend not to focus on defensive plays because growth stocks support large gains, but in a downturn like now,stocks that fall can fall all the way. If you are not focused on defense, your long-term performance will suffer significantly.
Consistently successful investors always adopt behaviors to protect their own assets. In the long run, this is far more important than the ability to spot huge growth stocks.
Buffett also says the following:
Rule 1: Never lose money.
Rule 2: Never forget Rule 1.
First secure the defense, then focus on stocks with strong growth potential in the future. If you persist in doing this stubbornly, your performance is sure to improve.
