Where Baseball and Investing Intersect

Would you pass on a six-year, $144 million contract hoping you could strike a better deal next year? Probably not. But Max Scherzer, a pitcher with my beloved Detroit Tigers, rejected such an offer. Most of us would consider Scherzer a dope for making this decision.

As a feature in Sports Illustrated points out, however, Scherzer is far from dumb. He graduated high school with a 3.9 GPA and scored a 35 out of 36 on the math portion of the ACT test. He's known as an intelligent man. So why walk away from so much money?

Scherzer has not provided an explanation, but we can see by his actions that he was probably seeking to maximize his earnings -- he believes he can make more money as a free agent next year. In his favor is the fact that this Cy Young award winning pitcher is one of the best in baseball. Yet Scherzer, who is 30 years old, faces the risk of injury or poor performance this year, thereby making a larger salary less likely.

The decision that Scherzer faced mirrors the trade-offs that investors must choose between, albeit in a significantly different tax bracket. If your investment goal is to make as much money as possible, then you've taken an approach similar to Scherzer's. Most of us are better served if, alternatively, we focus on investing with the goal of meeting our financial needs and, hopefully, some of our desires.

Continuing with a baseball theme, pursuing the highest returns possible is like swinging for a home run every time you're up to bat. Yes, the rewards can be quite substantial. But home run hitters tend to strike out more than a batter attempting to knock out singles and doubles.

Think of financial planning as a means to an end -- achieving financial security. Searching for out-sized returns is a high risk proposition that has little to do with this goal. Rather, seek investment returns that allow you to reach your objectives without taking on excessive risk.

Scherzer, of course, had a chance for guaranteed success. He decided to roll the dice instead. The rest of us are not guaranteed a certain investment outcome -- we have to take on some level of risk to allow our money to grow over time. Yet taking on some risk doesn't mean we need to recklessly swing for the fences.

Words of Wisdom

I was in Little League. I was on first base: I stole third. I ran straight across the diamond. Earlier in the week, I learned the shortest distance between two points is a straight line. I argued with the ump that second base was out of my way.