How is Skee-Ball Like Investing?
This is an interesting write-up by Chloe Lutts of the Cabot Heritage Corporation. I thought the analogy brought a bit of enlightenment to the subject.
How is Skee-Ball Like Investing? A 40, A 50 and A Hundo …
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Aside from investing, I have a few hobbies and interests. I like to cook. I enjoy yoga and snowboarding. I read, a lot.
And I play competitive skee-ball every Sunday night. Competitive skee-ball hasn’t quite attained the popularity of league bowling, or chess … or even Scrabble. But it has a growing following in New York and a few other cities. There are over 50 teams in my Brooklyn league, which is in its 15th season. The first National Championship was held last year.
Skee-ball doesn’t take much athletic ability, but it does involve some strategy, and lots of practice.
And, I realized the other day, it’s also a very good metaphor for some aspects of investing.
As you can tell from the picture above, the point values on each cup in skee-ball reflect the difficulty of getting the ball into that hole. What fewer people realize is that the point values also reflect the risk associated with making each shot. And that’s where skee ball is like investing.
Take the 100 cup, for instance. It’s worth twice as many points as the second-highest cup (worth 50 points) because it’s smaller and way up there in the corner—but also because if you shoot for it and miss, your ball will most likely fall into the 10.
In that way, the “hundo” cup, as it’s called, is a lot like small-cap stocks. If you roll for a hundo and make it, it gives your score a very significant boost. Pick a little-known small-cap stock that turns out to be a big winner, and you’ll see the same effect on your portfolio. However, if you miss your shot, you only get a 10. In much the same way, if your small-cap stock doesn’t turn out to be a big winner, it may waffle around the same level forever—and could even go bankrupt. And the hundo is a hard shot to make—most people miss most of the time.
The 40 and 50 are a little easier. I think of them as the growth stocks. They’re also less risky than the 100 cups. Miss a 40, and you’ll probably at least get a 20—you may even get a 30. And if you overshoot, and you could get a 50! The 40’s sweet spot right in the middle is why it’s the hole most players—including me—aim for.
Slightly better players will aim for the 50—however, the 50 isn’t within the 20 ring, so there’s a good chance of getting a 10 if you miss. I think of the 50 as representing more speculative growth stocks—companies that at least have positive earnings, but not much institutional support or history.
How you decide to play is a lot like building a portfolio. My 40-focused strategy is analogous to buying a portfolio full of stocks with good support and medium risk—I think of them as not-quite-blue-chips like Ameriprise Financial (AMP), Baidu (BIDU), Corning (GLW), Great Lakes Dredge and Dock (GLDD), Netflix (NFLX), NVIDIA (NVDA), Symantec (SYMC), The Mosaic Company (MOS) and Union Pacific (UNP). They have strong charts, growing earnings, and increasing support. They may not be household names, but investors are aware of them and they have strong institutional support. They probably aren’t 10-baggers at this point, but it’s unlikely you’ll lose all your money in them either.
50-style stocks are a little more speculative—they’re not as tested as the almost-blue-chips, but they have a little more potential: stocks like LDK Solar (LDK), TriQuint Semiconductor (TQNT), MercadoLibre (MELI) and Allot Communications (ALLT). These ones are a little more likely to surprise you—possibly to the downside. But they also have more room to grow.
Then there’s hundo stocks: There are obviously hundreds of unknown little small-cap companies out there, but a few that have been recommended in the Dick Davis Digests recently are Elephant Talk Communications (ETAK), Verenium (VRNM), SunOpta (STKL) and Beacon Enterprise Solutions Group (BEAC). These stocks have little-to-no institutional support, and may go nowhere. Some of them don’t even have positive earnings. But if you pick well, they can repay you well.
Putting together a balanced portfolio is a lot like rolling a game of skee-ball—you have to assess your skill level, risk tolerance and goals, and allocate your funds, or balls, accordingly.
In a skee-ball game you only get nine balls—obviously, a well-balanced portfolio can have more stocks than that. But it’s still wise for most growth investors to limit their portfolios to a reasonable number of stocks, to allow the winners to really shine (setting aside for now investing systems that rely on holding dozens of stocks).
For investors who want peace of mind and medium risk, filling your portfolio with 40-stocks is a fine strategy. Some will underperform, but like an underthrown 40 shot, they’ll probably at least turn out to be 20s. Overall, a 40-focused strategy is a good choice for investors who want to grow the value of their portfolio without it keeping them awake at night.
Investors with a little more risk tolerance might want to add some 50-stocks in an attempt to juice their returns. Aggressive investors who are confident in their abilities may even rely solely on 50-style stocks.
Then there’s the hundo stocks. Like most investors, most skee-ball rollers don’t even try for the hundo. Like picking a winning small cap, rolling a hundo takes lots of practice, and specialized skill. And even the best hundo rollers miss regularly.
However, one of the rollers I play with has figured out a good way to add some hundo potential to his game, without risking a complete wash. Rather than going for the hundo on all nine balls (which all too often results in a score of 90, derisively called a “right angle”), he goes for the hundo on only the first three of his nine balls. If he sinks one or two, he has a nice head start, and if he misses all three, he can still get a decent score by rolling 40s and 50s.
In the investing world, that’s roughly equivalent to adding a few high-risk small-caps to an otherwise growth-oriented portfolio. If even one of them turns out to be a big winner, your portfolio will reap the benefit. And if none of them go anywhere, you haven’t lost your shirt. For investors with a decent tolerance for risk, and the time and inclination to do the research involved in buying small caps, it can be a rewarding strategy.
What kind of investor are you? Do you roll all 40s, or do you throw some 50s and 100s into the mix? Or are you a straight hundo roller, risking a right angle once in a while but also hoping for that big 900 (the highest possible score in skee-ball; not yet accomplished in league play)?
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Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
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