Bet boldly when opportunity is clear or probability is high

Table of Contents

Buffett’s Bet boldly Practical Approach

In his 1992 letter to shareholders, Buffett wrote:

“In baseball lingo, our performance yardstick is slugging percentage, not batting average.”

He used baseball as a metaphor to distinguish between “seemingly diligent and efficient behavior” and “actions that truly create long-term value.”

A high batting average represents frequent but low-impact hits; conversely, a high slugging percentage means fewer swings, but each hit is more impactful. Buffett applies this concept to his capital allocation decisions.

Buffett’s statement stems from his decades-long investment discipline. What drives Berkshire Hathaway’s growth is often not a large number of small profits, but a few major successes.

Berkshire Hathaway’s holdings in companies like Coca-Cola, American Express, and GEICO have generated returns far exceeding many smaller or shorter-term investments.

At its core, this baseball analogy stems from a belief of Buffett’s: rather than constantly chasing small incremental gains, it’s more effective to identify a few truly exceptional opportunities and invest boldly, leading to superior long-term performance.

However, Buffett has repeatedly emphasized that short-term earnings fluctuations do not represent a company’s true economic strength. His method of measuring performance is the compounding growth of long-term internal value, what he calls “slugging percentage.”

This analogy showcases Buffett’s consistent investment philosophy: bet boldly when opportunities are clear, and remain patient when uncertain.

Unlike those who favor highly speculative, short-term trading strategies, Buffett believes that “when to swing is more important than the number of swings.”

Regardless of market volatility or excessive optimism, this thinking serves as a reminder: in uncertain times, investors are prone to adopting strategies to reduce volatility, but Buffett believes this may sacrifice significant long-term returns.

In overheated markets, his analogy serves as a reminder to investors not to be misled by the superficial results of short-term trading.

Warren Buffett’s core message, conveyed through baseball, is very clear: investment performance should be measured by the “magnitude of success” and the “sustainability of results,” not the number of positive returns.

Munger holds similar investment views

In a 1995 speech at the USC Graduate School of Business, Munger stated:

“The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.”

He also stated at the Daily Journal shareholder meeting, “Everyone has two or three good investment opportunities in their lifetime; the key is whether you can seize them when they come.” He further estimated that “Berkshire has made about 100 important decisions to date, averaging about two per year.”

Using the Kelly Criterion

The Kelly Criterion, derived from American mathematician John Kelly, was proposed in 1956 and applied to the stock market. The Kelly Criterion is a well-known simple money management strategy; the formula is straightforward, logical, and easy to implement.

This formula was initially used primarily for betting in casino games. Later, it was widely adopted by investors for managing their money in investments, and many well-known investors, including Buffett and Munger, recommend this simple formula.

The formula is as follows:

Percentage of bet = Probability of winning – (1 – Probability of winning) / Probability of winning

Suppose we are bullish on a certain stock, expecting its return (i.e., the probability of winning) to be 40%, but the risk (i.e., the probability of losing, i.e., 1 – probability of winning) to be 10%. According to the Kelly Criterion, how much money should we invest?

Substituting the data from the example into the Kelly Criterion:

Percentage of bet = (0.4 – 0.1) / 0.4 = 0.75

Disclaimer

The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.