Most of the investors want to become rich and wealthy soon. Especially if you are the stock market investor, we all are always in search for the next “home run” stock. But if you are investor like us, who believes in preserving and compounding their capital over the long term, a better option is to invest in high quality companies, and let them ‘swing for the fence’.

Jeff Bezos, the CEO of Amazon, in his 2015 annual report to shareholders drew an analogy between Amazon business philosophy and baseball to illustrate his mentality of always swinging for the fences:

“When you swing [in baseball], no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”

If we peep into the history of Amazon’s business model, the company was built on swinging for the fence. They started as an online bookstore during the era of brick-and-mortar book shops, to the experiment that created the Amazon Web Services juggernaut, the company had hit home run after home run much to the benefit of its shareholders.

babe-ruthA logical question then, is whether swinging for home runs can also be viable strategy for investors. If Amazon can be as successful as an entity why not individual investor by applying same strategy. Before we go further, let me make all the readers familiar with Baseball statistics. The average probability of hitting home run for professional Major League Baseball players is 33 times at bat. The greats can beat the odds: Mark McGwire hit a home run every 10.6 times he went to bat; Babe Ruth hit a homer every 11.8 times and Giancarlo Stanton every 14.4 times. But this also means that more than 9 times out of 10, when Ruth swung for the fences, he struck out.

For investors, the allure of trying to pick that next home run stock can be difficult to resist. However, not to forget that baseball career spans for thousands of innings but as an investor we might only strike for handful of times before going broke. And just like professional athletes, investors are also affected by emotions (greed) and overconfidence that can lead them to overestimating the odds of success and/or the payoff if successful.

Stepping back, when I think about it, there are 3 key reasons why swinging for the fences might be sound strategy for businesses, but not for investors who want to preserve and compound their capital over the long term. Firstly, Amazons of the world is so big that few failed “moon shots” might only be a blip in their performance. Secondly, high quality businesses have typically recurring cash flows to fund their R&D endeavors. Investors don’t have that luxury- a 20% loss in one year is not replenished by operating cash flow in the next. Finally, businesses have tremendous human capital to originate, execute and influence the outcomes of these low probability, high payoff ideas. Investors on other hand, have limited resources (time) and rarely any direct influence over the performance of their stock picks.

However, this doesn’t mean investors can’t participate in home runs while protecting their capital. The prudent investor can aim to hit singles – high quality businesses with wide re-investment moats that can be bought at discount to its intrinsic value. Well, you won’t hear those cheers of home run by spectators but you will get to your first base, which means you are still in the game and haven’t struck out. By picking high quality companies with strong management and long runways of growth, investors can let these companies leverage size, cash flow and intellectual capital to swing for the fences for them. From Indian stock market context, for example, Kitex Garment is in far better position to grow its business by launching its “little Star” brand in USA, Mindtree is in better position to manage Magnet 360 with its intellectual capital and Eicher Motors is in good position to open its bike show rooms in Europe and USA. Should if the managements of these companies swing and miss, the compounding power of these companies core operations can still leave investors with fine returns over the long term. After all, there are more ways to score runs in baseball then just swing for the fence.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.