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The Gene Mauch rule for investing success

Gene Mauch was the manager of the Phillies baseball team when I was a boy growing up in Philadelphia. He once said something in an interview that has stuck with me ever since.

Mauch said that, when his team was on a winning streak, his job was to pop holes in the inflated egos of his players. When players are winning, they start thinking that they are so awesome that they can never be beaten. They get sloppy. They stop doing sit-ups. They stop backing up throws. They’ve got it. They’re hot. Mauch would yell at the Phillies at such times. It was his job to bring them back to earth.

His job changed when the team was on a losing streak. The same guys who were so full of themselves a week before would now be down on themselves, certain that they would never again find the groove. They so lacked confidence that they were afraid to swing the bat with authority, afraid to take chances on the basepaths, afraid to take control of a game. At these times, Mauch would not yell, no matter how many strikeouts or errors he saw. At these times, it was his job to remind his players how great they had to have been to have made the team in the first place.

I believe in the Gene Mauch rule. It’s easy to yell at people when they mess up. Easy and dumb. People are never as incompetent as they appear to be when they are making mistakes.

And its easy to cheer people on when they are turning up aces. That’s dumb too. No one needs to be reminded of how great he is when the entire world is busy telling him how great he is. People are never so awesome as they appear to be when they are hitting all line drives.

I am a critic of Buy-and-Hold. I advocate Valuation-Informed Indexing instead. Why? Valuation-Informed Indexing is rooted in a belief in the Gene Mauch rule.

Bull markets are the stock market’s equivalent to baseball winning streaks. During bull markets, the temptation is to get overly excited about stocks, to count the phony and temporary bull market gains as permanent. Gene Mauch would not approve.

Gene Mauch would be yelling at investors who took the numbers on their portfolio statements seriously in the late 1990s. Stocks were priced at three times fair value in the late 1990s. That means that stock investors should have been expecting to see a loss of two-thirds of their accumulated wealth of a lifetime as stock prices worked their way back down to fair value in the coming years. But how many investors knew that? How many of the “experts” in this field reminded them?

Gene Mauch would have reminded them. He understood that believing in your own press releases when things are going good leads to laziness and arrogance and that laziness and arrogance lead to losses, both in baseball and in investing. We didn’t need to hear financial planners telling us how smart we were to invest in stocks in the late 1990s. We needed them to burst our bubble. If Gene Mauch had been around, he would have given a few of us a kick in the bottom.

He wouldn’t be doing that today, however.

We don’t need to be brought down a few pegs today. We need to be reassured that we are not the losers that we are coming to believe we are. Mauch would be pointing out to the investors of today that, while prices remain too high today for us to realistically expect good long-term returns just yet, things are certainly moving in the right direction. After the next stock crash, prices will be where they need to be for stocks to represent a strong long-term value proposition. Today’s investors should be getting prepared, not depressed.

Buy-and-Holders are like the baseball managers who are thrilled with their teams as long as they are winning and are punching lockers when they experience a losing streak. Buy-and-Holders are the Billy Martins of the investing world, getting excited over the phony profits of bull markets and looking for a place to place the blame when the phoniness inevitably takes things to a bad place. Have you noticed that the same Buy-and-Holders who praised their own genius during the bull years do not accept personal blame for the losses they have seen over the past 12 years? Wins are they doing. Losses are the fault of a bad economy.

Mauch understood that winning streaks and losing streaks are rooted in the same thing — human emotion. When things are going well, we feel confident and our performance goes up a notch. When things are going poorly, we are afraid to show our faces in public and our fears cause us to underperform. You don’t want players to become too full of themselves during winning streaks. Those that get caught up in a phenomenon that is rooted in luck will feel all the worse when lucks turns the other way. You want your players to achieve emotional balance, to know that they are good enough to win but not good enough to win without working it hard.

So it is with investing. Valuation-Informed Indexers don’t count the phony gains of bull markets as real. When stocks are priced at three times fair value, we divide the number reported on our portfolio statement by three so that we know the real and lasting value of our portfolios. We don’t want to experience panic when things turn bad. The way to avoid panic when things turn bad is not to buy into the nonsense being told when things are going well.

Gene Mauch understood that managing a baseball team is not primarily about mastering the mechanics of hitting or pitching or fielding or running. Baseball teams are comprised of human players with human emotions. The first job of a manager is to help those humans avoid the emotional ups and downs that plague teams lacking managers as smart as Mauch.

Strategies come and go in the stock field. There’s always a new craze. Today it is Buy-and-Hold, tomorrow it will be for something else.

Emotionally balanced investing is not a craze. Valuation-Informed Indexing is the only strategy I know of that never once would have let you down over the 140 years for which we have records of stock performance. Gene Mauch was a genius.


  1. Ken Faulkenberry

    As a big baseball fan I love the Gene Mauch Analogy! As a believer in being a contrarian I love the call for valuation investing. As a fan of Rob Bennett I love the education offered in a fun and informative manner. Need I say more except:
    I love this article. Great read Rob!

  2. Rob Bennett

    Thanks for those exceedingly kind words, Ken.

    It’s nice that some people remember Gene Mauch (Kim told me that she remembers him as well). I explained to Kim how the Phillies used to regularly lose close to 100 games per year in my youth. But every time Spring training came around, I believed those articles in the papers saying this was the year they were going to turn it around. I believe this may explain why I believe today that we are going to be able to change the history of investing by informing middle-class people about the things that we have learned from the academic research of the past 30 years that Wall Street often “forgets” to tell us about. Once a sucker, always a sucker!


  3. Bret @ Hope to Prosper

    Being a long-time Angels fan, I liked Gene Mauch. I honestly thought he was a better pitching coach than a skipper, but he did pretty well with a underdog team.

    As for your investing strategy, it makes a lot of sense. But, very few people follow it. I remember right before the dotcom crash one of our engineers was trying to tell me that Cisco was a bargain at a P/E ratio of 80. Of course, I didn’t buy Cisco at those valuations. But, most of my mutuals funds did and they got clobbered.

    I read an investing book by Robert Lichello that said, “You have a better chance of prying a pitbull off your ankle than getting someone to sell a stock that has gone up 80%”.

  4. Rob Bennett

    it makes a lot of sense. But, very few people follow it.

    Thanks much for stopping by, Bret. I always have great experiences when I visit your blog. It’s a super resource.

    It’s a chicken-or-egg thing. I’ve asked people what they don’t like about it. The usual answer is: “It’s not what most other people do.” The only reason Valuation-Informed Indexing isn’t popular is because Valuation-Informed Indexing isn’t popular! It’s sort of hard to know where to start in coming up with a plan to change that one!

    My personal view (it may be that there is not one other person on the planet who believes this but I believe it strongly) is that we MUST persuade people to follow it. Teaching people how to invest properly is more important today than it has ever been before. When we took defined benefit pensions away from workers, we took on a responsibility to provide a means for them to learn how to invest successfully. In earlier crashes, only the rich suffered a wipeout. Now it’s everyone.

    When everyone suffers a wipeout of their accumulated wealth of a lifetime, the economic crisis that follows is just devastating. The numbers tell a story re what we are in for if we don’t make changes that is so dark that most of us are not even capable of considering the possibility that stocks will continue to perform in the future somewhat as they have always performed in the past.

    My take is that capitalism is going through growing pains. If we allow people to learn what works in stock investing, we are going to see a huge boom because middle-class people for the first time will be able to benefit from the rewards of having a free market. But if we continue to spend hundreds of millions of dollars encouraging people to follow investing strategies that are the opposite of what the academic research shows can work, we’re all going down together.

    My personal view is that it is not a question of whether it is a good idea to let people learn what works. We don’t have any practical choice unless we want to end up living in a society very different from the one we have all grown accustomed to living in. You can’t have a free economy in which you force people to invest in stocks to provide for their retirements and then sit quietly while Wall Street spends hundreds of millions of dollars encouraging them to invest in ways that leaves them with zero chance of achieving their goals. We either permit a learning process to begin or it’s Game Over for the entire shebang.

    I personally am optimistic that we will turn things around in time. But I will admit to having some moments when my confidence has been shaken. I believe that the next crash will put us in the Second Great Depression and that may soften people’s hearts a bit.


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