In baseball it’s often said, almost always accurately, that good pitching will stop good hitting. We’ve long believed that you build teams around pitching, thinking that the whole offense/defense dichotomy in baseball is a little bit upside down. What could be more attacking than having someone stand a mere 60.5 feet away from you, on a little hill no less, and throw a hard object nearly 100 miles an hour at you? We can imagine bringing invaders from another planet to a baseball game and trying to answer why the guy trying to defend himself with a big stick from this threatening object is actually the one playing offense.
As you know, we are always looking for analogies and metaphors here, since we have the wonderfully pliable convertible bond as our analytical clay. Since pitching has offensive characteristics and batting defensive ones (especially when there are two strikes), let’s think more about the offense and defense in owning convertibles. Convertible bonds are often described as a more conservative (defensive) way to buy stocks and a more aggressive (offensive) way to buy bonds. Yet below these reasonably on-target headings lie all manner of nuance.
Consider convertibles versus stocks. If it’s been established (and it has) that the best way to make money investing over the long term is to focus on avoiding big losses, letting modest winners and the magic of compounding do their things, then isn’t a strategy that plays to these strengths oddly aggressive?
Now let’s look at bonds. It’s not said nearly often enough that buying traditional bonds, considered a “safe” investing strategy, is virtually identical to selling deep-out- of-the-money naked put options, which is also known as “picking up nickels in front of a steamroller.” Giving yourself a chance for some bigger upside via convertibles, in a real portfolio sense, helps mitigate some of that stealth tail risk in a bond fund. Offense becomes defense.
On that note, I’m rooting for my beloved Mets, the franchise my father used to teach me baseball 46 years ago. I’m hoping they can ride an aggressive, offensive, dominating pitching corps to another title. It won’t be easy. The Royals, more than any other team, get the most out of what they have, and rarely beat themselves. Their drawdowns are almost nonexistent. The Mets will have to keep the Royals’ returns consistent with a zero-rate, or at least low-rate, market, to keep them from compounding their way to a title. It should be fun.
(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).