What can the Home Run Derby teach us about investing?

What does the Home Run Derby have to do with the stock market? Absolutely nothing, right?!?

Well call me crazy, but while watching Big Papi mash over 30 homers on his way to the home run crown during the All Star break, I made an unexpected connection between the two.

(Courtesy of NY Daily News)

Going into the Home Run Derby, I was tempted to pick David Ortiz to win, but then I remembered that he had been in a few Derbies (is that how you pluralize it?) before and hadn't won. So I decided on Vernon Wells because of his trademark short, powerful uppercut swing.

Then, the first round came.

Vernon Wells was DOA and hit just two homers in the first round. There goes my pick.

But I wasn't down and out. Just because I picked a losing candidate based on a misguided prediction doesn't mean that I just stuck with him and hoped that none of the other players would hit more than two home runs so that he could make it to the second round. I knew that the chances were not in my favor by staying with Vernon Wells to win, so I changed my pick to someone different. That got a bad reception from my friend. Apparently, you can't change your prediction once the contest has started. Maybe that takes the fun out of picking a Home Run Derby winner, but you sure can do that in the stock market.

So I picked a different player. Who did I pick? Did I go with a diamond in the rough Nick Swisher or Matt Holliday before the first round was over because they nearly crawled into the second round? *#@% no!!

I wanted to go with a hot hand, someone who hit a lot of homers in the first round and was going to continue to stay hot in the second round. Corey Hart had the most bombs in the first round with 13, but the order for the second round was designed in such a way that he was to bat last. That means that even after the scorching first round, he would be ice cold by the time he picked up the bat again. And so it was.

So I was left with the choices of Miguel Cabrera, David Ortiz, and Hanley Ramirez. Each one of them was pretty hot in the first round, not as much as Corey Hart but enough to get the job done. But again, I referenced the schedule for the second round. Hanley was going second to last, so I figured he might cool down too much to hit some true moonshots. But Big Papi and Miguel Cabrera went first and second, respectively. They both had just had their first round not too long ago, with Big Papi having a little more rest than Miguel who only had one player hit between his first round and second round appearance.

Considering Miguel Cabrera probably wouldn't be able to sustain the same trend trajectory, that he wouldn't be able to continue belting homers at a high rate so soon after his first round, I decided to pick David Ortiz to win. I went with a high probability pick based on who was building positive momentum and who would have the ability to sustain that momentum based on the length of his rest. And the rest, my friends, is history because I picked the winner!!... even though I jumped ship from Vernon Wells in a matter of minutes.

That might not fly in a friendly game of picking the winner of a home run contest, but that's fair game in the stock market. If you pick a stock based on some interesting research or a clever idea (like Vernon Wells and his uppercut swing), you don't have to ride it into the ground just to prove that you're right. You can abandon ship when things start to get rough and use the lifeboats before your boat is completely submerged under the waves. And you can instead pick a stock with some momentum behind it, with a higher probability of success based on the trajectory of its trend, and laugh at the people floundering around in the waves struggling to keep their head above water.