Tony La Russa’s Commencement Address Applied To Investing

Tony La Russa, the current director of baseball operations for the Arizona Diamondbacks who coached the St. Louis Cardinals to World Series victories in 2006 and 2011, gave the commencement address last week to graduates of Washington University in St. Louis.

In his speech, La Russa mentioned the value of self-reliance and resisting the temptation to outsource your thinking to machines:

I think the essence of personalization is to start with, you personalize your feelings about yourself. The thing I said about having an ego. Personalizing is about respect, trust, and caring. You act in a way that you earn your own respect. Don’t ever fool yourself. You want to trust that you’re doing your best, you’re not going to fool yourself. You’re going to care about what you represent and what people think of you. And then you translate that into the people that you work with, respect, trust, and care.

It occurs to me that, I mean I’ve talked to our teams about this for a long time now, there was a title of a song that Dennis DeYoung wrote for Styx, “Best of Times/Worst of Times.” I hate the word “worst” but these are the toughest times. What do I mean by that? For all of you, things used to be simpler. Now there are a lot of distractions. When you go forward, values that used to be automatic are not. You have people who just look at you as a Washington University graduate, be envious, they haven’t paid the price that you have paid, they will try to … I mean in terms of study and effort … and they will try to distract you and try to remind you, and those are tough.

There’s also a real emphasis now on machines, and what they produce, and baseball, it’s this thing with metrics and analytics and they claim that they can tell you who to play, how to play, when to make changes, and that’s, it’s a nice tool. I will suggest that you study and prepare with all that kind of information but when you get into it, be aware of the reliance on machines and prepared knowledge. So those are the worst of times. It used to be easier.

Every so often, someone in the finance community will claim to have the perfect numerical formula that will ensure great results going forward. It’s fool’s gold—the ultimate shiny object in investing—to think that you can plug numbers about a particular company into a stock screener and then make a determination about whether it will be a good investment good forward. That can never work because the performance of a stock will always hinge upon the relationship between profits right now, profits in the future, and the cash returned to you in the meantime. You can figure out the profits generated right now easily enough, but the cash returned to you in the meantime will hinge upon making an accurate determination about *profits in the future.* Because machines are incapable of predicting that event (future profits), they cannot do your thinking for you.

Instead, financial data should be facilitators to making good decisions. When you see Coca-Cola earnings returns on equity of north of 28% for a very, very long period of time, you should consider a company with a business model like that a candidate for a long-term holding. When you see that Hershey chocolate is earning 16-18% return on assets for almost a century, you should consider that company a candidate for a long-term holding. When a large, integrated oil company like Exxon, Chevron, or Royal Dutch Shell starts trading at 7-8x profits in a normalized energy environment, you should treat that price as a clue that it is time to contemplate a potential investment in one of those businesses.

The pursuit of financial success should be cherished because it represents the perfect outlet for the triumph of personal responsibility. The first thing to realize is this: “Hey, this is all on me, and I’m not going to blame anyone else for my failures. If I don’t understand a business, I won’t invest in it. America has over 15,000 publicly traded companies, and the rest of the world gives me even more to choose from. I can find a couple dozen businesses that I can figure out.” From there, it is about using your own independent thinking to determine which companies will be chugging out more and more profits five and ten years from now—if you get the business right, everything else takes care of itself (even if you slightly overpay for the stock). Buying Hershey stock at 30x earnings may not be the most intelligent exercise in value investing, but it still probably falls into the top hundred or so decisions that someone could make who is contemplating a long-term investment of 25 years or more. The ability to think independently is our great gift, and it’s a shame that a lot of people seem eager to outsource that to a financial advisor or a calculator that purports to find good investments for them. If you took a walk around the block and thought long and hard about the companies that will still be triumphing in the United States in 2030, you would know how to build the kind of portfolio that will lead you to prosperity.


Originally posted 2014-05-20 22:00:46.

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One thought on “Tony La Russa’s Commencement Address Applied To Investing

  1. scchan_2009 says:

    There was an article on The Economist in how much BlackRock’s risk and financial system gains popularity in the industry ().
    I think there is a limit how much one can get from financial models or data; finance and economics are not physical sciences, there may be a good model for high energy physics or weather, but there is no good model for human behaviour in finance and economics. 
    It takes discipline and personal understanding in the underlying business to get reasonable returns (or at least not running huge risks to lose a lot of money). As Benjamin Graham said that it was actually not too difficult to get reasonable results (the hard part is to get superior results); and he said that greatest loses of investors always come from buying shares of bad companies, but not from overpaying reasonable companies.

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