1 Gigantic Sign You’ve Found A Fat Pitch Investment

A few weeks ago I wrote the following in the article How Many Stocks Should You Own At One Time?
Have you ever heard of Warren Buffett’s concept of the 20-hole punch card?
“If you were given a punch card with 20 ticks on it when you graduated, and those were the only investment decisions you could make throughout your entire career, how would you use them? You would likely be very selective, and probably very rich. This type of mentality will force you to be patient.”
With this mindset you’d only invest in what Warren Buffett refers to as fat pitch investments.
“I call investing the greatest business in the world,” he says, “because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
“Wait for a fat pitch and then swing for the fences.”
These two concepts combined force you to think over the long term… Force you to be patient… And if you can follow them both will make you far richer according to Buffett.
***

But what I didn’t talk about in that article… How do you KNOW you’ve found a great investment after seeing it?

How do you know you’ve found a “fat pitch” investment as Warren Buffett calls them?

One sign you’ve found a fat pitch investment… It’s enormously undervalued.

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And I’m not talking here like 10% undervalued. I’m saying 50% or more undervalued.

What does that really look like?

It could be a few things.

But let’s say you do the valuations, and you think the stock is worth $100 per share… But it’s selling in the market for $20 per share.

In this scenario, you may have found a stock that is potentially 80% undervalued. This is a potential fat pitch investment.

I’ll get to why I say potential below…

But if this same stock was selling for $80 per share on the market it’s still undervalued… But it’s not so enormously undervalued that you need to evaluate it more right now.

This is a simplified example of what Buffett means when he says only swing at fat pitch investments.

Now, the reason I said potential above is that it’s also not the only thing to consider either… Some of those other things are:

  • Is it undervalued for a reason? As in, is it a bad business?
  • Are you missing something in the analysis?
  • If it is legitimately undervalued… Why is it so undervalued?

And a lot more.

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As with any investment, there’s a ton to think through before buying it. Even when you find something that’s enormously undervalued.

However, if you do find stocks that are 50% or more undervalued to your estimate of valuation… This is a gigantic sign you may have found a fat pitch investment.

Why?

Because when you find something thats enormously undervalued to what you think it’s worth, it does a few things.

  1. It increases your margin of safety – which I talked more about here.
  2. When you increase your margin of safety, it lowers the potential downside risk of losing money on the investment.
  3. It also increases the amount you should expect to earn owning the investment.
  4. It increases the probability of owning a successful investment.

And that is the entire goal of successful investing.

Increasing the odds in your favor to have more successful investments than others… COMBINED with lowering your odds of having investment losses.

If you can do this well enough for long enough, you’re almost guaranteed to become wealthy over time because you’ll be earning higher investment returns than other average investors.

This may seem simple… And it is.

But just because its simple, doesn’t mean it’s easy.

You still must find these investments… You still must value them well enough to make sure you’re buying a truly undervalued stock….  You still need to evaluate them for potential red flags… And then you must have the patience to wait until you find an investment like this.

But when you find these investments… They almost scream at you.

An alarm bell should be going off in your head… I need to research this further right now so I don’t miss out.

That’s how undervalued something should be when looking for “fat pitch” investments.

In our Value Investing Masterclass, you’ll learn 23 different simple valuation techniques to value these fat pitch investments.

You’ll also learn how to FIND these investments… AND you’ll learn how to evaluate them well to make sure they’re truly a great investment and not a value trap that will crush your returns.

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Always in your service,

Jason

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