Babe Ruth certainly need no presentation, but what needs presentation is the “Babe Ruth Effect” which is a nickname that some bank analysts gave in the early 2000s to a classic goal of many investment managers: hitting a home run.
It quickly became the wet dream of many retail investors as well: pick the new Microsoft, or the new Google (or the new Amazon, as of lately) but also some well-researched market theorists like Nassim Taleb fell for the same idea, that what matters is to make one big home run on the right trading idea or investment, and you will make a kill and be set for life.
Although that may have happened for a few lucky individuals, the vast majority of investors may experience one (sometimes very lucky) home run and then a bunch of very unlucky batting failures, which in the end will ruin their long-term returns.
The history of the most successful trading firms in history as well points in a different (opposite) direction than the Babe Ruth Effect, since the most successful firms in history are:
a) High Frequency Traders (which in most cases is not really trading but simply and added “cost” applied onto other investors trades, with the excuse of liquidity providing)
b) statistical traders (i.e Renaissance Technologies, D.E. Shaw, etc.)
Long-term holders for sure will make money when the market goes up (until it goes down again erasing a good chunk of their returns) and die-hard permabears will (briefly) make (some) money once every 5 to 10 years, when the market occasionally goes down.
Both type of investors are wrong in their strategy, but the occasional, cyclical home run (like a wrong clock that from time to time points to the right hour) will reinforce their believe in the Babe Ruth Effect and push them to chase again another home run (while losing in the meanwhile a large series of trades).
The truth is that there is no difference between trying a lot of short term trades for a small profit, and a few long-term, home-run trades that will make you rich (if they ever work). All that matters is the equation:
number of wins*size of win / number of losses*size of loss
If across a defined period of time, a long period of time, your wins offset your losses, then you have a winning strategy.
The problem is that short-term trades and long-term trades are two completely different beasts when it comes to reliability of the signals: short-term price moves are relatively predictable with statistics as we have so much data from Tick to minutes, to Daily, while long-term price moves will only become predictable with statistics in about 500-700 years from now, when we will have accumulated enough Monthly and Yearly data (now we have only ~100 years, which means only 100 samples for Yearly predictions, for example, not so much to build a model…).
So, when chasing the Babe Ruth Effect, keep in mind the trading horizon, reduce it to what is really predictable (i.e. short-term) and plan to take profit on whatever you can get home safe.
There’s no real room for serial Babe Ruth batters in the world of investing, it’s just a fantasy pimped by books, “trading schools”, market gurus, worthless analysts, etc. Consistency, reliability and repeatability of a successful investment process is the only thing that counts, or, in other words: can you ALWAYS make money?
