Warren Buffett's Strike Zone: How to Earn Grand Slam Investment Returns

Are you a baseball fan? After all, it’s America’s pastime. If you are a fan, you may remember the baseball Hall of Famer Ted Williams.

Ted finished his playing career with a .344 batting average, 521 home runs, and a .482 on-base percentage—the highest of all time. His career batting average is among the highest of any player in history.

You may be too young to remember Ted. But Warren Buffett remembers him. Buffett is almost 90, you know, and Ted was a big star through the 1940s and ’50s—a household name.

Eight years after hanging up his cleats, Ted published a book called The Science of Hitting. You wouldn’t expect that Warren Buffett would turn to a baseball player for investing advice. But when you learn about the ways of “The Oracle of Omaha,” you’ll realize that he can gain wisdom from the most unexpected sources.

I hope you gain some investing wisdom from Williams, Buffett, and this post, as well.

This post is the 11th in a series that Bryan Taylor, John Jacobus, and I affectionately call “Warren Buffett is My Real Estate Mentor.” We hope Buffett’s wisdom impacts you as it has us.

What Is Warren Buffett’s Strike Zone?

From Warren Buffett at the 2003 Berkshire Hathaway meeting:

“Ted Williams, in his book The Science of Hitting, talked about how he carved up the strike zone into different zones and only swung at pitches that were in his sweet spot. Investing is the same way.”

Six years later, in a 2009 meeting with business school students, Buffett gave more details on this strike zone philosophy:

“Ted Williams, who wrote The Science of Hitting, broke the strike zone into 92 ball-shaped sections. He knew, if hit in his sweet spot, he’d hit 430, a little further out, and he’d hit 350. You have to know your sweet spot. The beautiful thing about investing is that it’s a ‘No called strike game’ where unlike baseball the only strikes in investing are when you swing. I don’t have to swing.”

Buffett is famous for only taking action when he knows he will at least get a base hit. That involves having a really strong understanding of his “base hit” zone. Buffett often refers to this as his circle of competence.

This is not a mathematical exercise but rather the result of compounded knowledge of industries and assets that has resulted in Buffett knowing exactly where he feels most comfortable.

I recently finished two books on Buffett (The Snowball and The Warren Buffett Way). I also just finished another book called The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, which highlighted Buffett’s unusual practices and phenomenal track record.

One thing that struck me was Buffett’s willingness to make very quick decisions on large acquisitions. He did this with no spreadsheets, no site visits, and virtually little apparent due diligence. It sometimes happened in as little as 15 minutes and with a virtual handshake by phone.

For example, Buffett spent $345 million in 1979 to help Tom Murphy and Capital Cities acquire ABC. He apparently made this decision in a very short phone call with Murphy (which is, by the way, an example of Buffett betting on the jockey first and trusting them to get the horse right).

Seventeen years later in 1996, Buffett reported a $2.2 billion gain on this investment. Not bad for a knee-jerk decision, huh?

In baseball, you can leave the bat on your shoulder and strike out every time. Thankfully, in investing, this is not the case at all. No one is forcing you to swing at any investment.

“Unlike Ted, we can’t be called out if we resist three pitches that are barely in the strike zone,” Buffett wrote to Berkshire Hathaway shareholders in 1997.

How Investors Can Apply the Strike Zone to Real Estate

So, what does this mean for real estate investors?

Knowing your sweet spot will allow you to make better buying decisions. Why? Because remember, you make your money when you buy. Yes, it’s when you upgrade, operate, and sell, as well, but buying right opens the door to all of these opportunities.

Breaking down your strike zone into 92 sections is analogous to breaking down real estate deals based on their various attributes—attributes such as asset type, location, size, market, management team, etc. And if you’re investing passively, this will—like Buffett—mean a careful analysis of and bet placed on the best jockey.

Always remember: some of your best deals as a real estate investor are the deals to which you say, “No.” And the best way to say no to a deal is to understand your strike zone and confidently walk away from a bad pitch.

I wrote a book on multifamily investing; I even called it The Perfect Investment. But as I look around the investing landscape these days, and even look at some of the investments my friends and colleagues are making, I wonder… Are they being too eager to say, “Yes”?

I’ve been wrong before, though. I was nervous about compressed cap rates and high prices in 2015. Our company was outbid on multifamily deals that seemed overpriced then. But some of those operators have sold those deals for great profit in the years since.

I guess I shouldn’t feel too bad. Multifamily mogul Sam Zell sold 23,000 apartment units that same year. It looked like the top of the market. But you only really know the market from a rearview mirror perspective. Even Buffett doesn’t predict the future when it comes to market timing.

Someday I will be glad about the deals I said no to. And I predict that you will, too. That is, at least if you’re trying to follow in Buffett’s footsteps like me.

Not All Great Investments Will Fall Within the Strike Zone

Buffett missed out on the tech boom of the late 1990s. Intentionally.

In his now-famous 1999 speech to his friends and colleagues in Sun Valley, Idaho, he laid out his reasoning for not investing in tech. He flew in the face of virtually everyone at the meeting and around the world. He said that he couldn’t predict the future of tech and the valuations for tech stocks didn’t fit in with the sound logic that had made him the world’s most successful investor.

And he paid dearly for it—at least in the form of criticism, ridicule, and even dismissal.

He was dismissed as a has-been investor, one out of touch with the realities of the times. And many investors and money managers left the Berkshire Hathaway fold. But Buffett stood firm.

And we know how that story ended. Buffett’s willingness to stick to his principles and say no allowed him to largely avoid the devastating burst of the tech bubble a few years later. Many of his “boring” investments soared along the way, too.

“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot,” Buffett has said. “And if people are yelling, ‘Swing, you bum!’ ignore them” (as quoted in the Omaha World-Herald, February 26, 2018).

How will the story end for you, Mr. and Mrs. Real Estate Investor?

Why Bragging Rights Aren’t an Indicator of Sound Investing

Think about this…

No one brags about the deals they said no to. They often want to tell everyone about the deals they are getting done. There are profitable incentives in place for people to act and to close deals in order to talk about them and build a reputation. And there are often fees to be earned by those who will profit whether investors make money or not.

Beware of those who profit from fees earned just by making a deal. Not all of these are bad. But be sure that deal sponsors’ interests are largely aligned with yours to the degree that you can.

Think of a few names of the world’s most famous real estate investors. Then, think about this…

Some of the world’s greatest real estate investors are those you’ve never heard of. Why? Because at the moment, they’re saying no to virtually every deal.

Maybe they’re stockpiling cash for upcoming opportunities to buy when all of the famous operators are selling—sometimes in a panic and sometimes through the channel of the bank who foreclosed on them.

Ted Williams laid out 92 baseball-shaped sections where pitches could come his way. Only three of them led to his optimal batting average.

Warren Buffett’s relative strike zone is probably even smaller. Buffett is famous for making few acquisitions and holding them for a very long time—ideally forever.

So, what is your strike zone? Are you swinging wildly at every pitch, like I used to do? Or have you narrowed your strike zone like Ted and Warren?

Let’s talk in the comment section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.