As March Madness begins, we would like to revisit an article from Soundmark principal and sports enthusiast, John Buller. His comparison of the beloved NCAA basketball tournament and the investment world is uncanny and highlights three principles to remember when filling out tournament brackets and building portfolios:
- Past performance is not indicative of future returns.
- Perfection is not attainable for an extended period of time.
- A common denominator for success is a good coach.
Originally Published in April 2016
It’s March 13, 2016. Spring is in the air. Baseball season is about to begin and March Madness gets into full swing. On this “Selection Sunday,” teams that will compete in the NCAA basketball tournament are selected and seeded. This is the day that pencils are sharpened, office pools are generated, and people start dreaming of owning the perfect bracket. Do we follow routine and pick a blue chip school or take our chances on a Cinderella hopeful with a potential greater payout?
Too often, investors wrestle with these same issues. Decisions are based on history, intuition, and a heavy dose of wishful thinking. The investment world and the NCAA brackets have their respective “can’t miss opportunities,” like the Apples and Googles of the stock market, or the Kansas Jayhawks or North Carolina Tar Heels in your winning bracket.
Like stocks, basketball teams are given a value, or “seed,” based on how the general market perceives their ability to deliver, and bracket participants are encouraged to take lower seeded teams in exchange for a higher rate of return.
From a human behavior standpoint, there are similarities in the basketball and investment worlds. People may follow a particular stock or team for a given period of time to identify a trend. They may listen to self-anointed experts like Jim Kramer, Charles Barkley, or the neighbor next door to predict the so-called winners and losers. NCAA experts will select Duke University simply because it’s “Duke,” a team from the ACC. Likewise, many investors will invest in Google because it is a popular name in the high tech industry. Regardless of the selection method, once the tournament begins, disappointment sets in, with daily winners and losers, much like the world of investing.
It is now April 5, 2016. March Madness is over and Villanova University has been crowned the champion. The parallels to investing simply can’t be ignored:
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS:
North Carolina, an odds-on favorite to win the championship game (and winner of multiple past national championships) lost to Villanova, who had not won the NCAA tournament in 31 years.
PERFECTION IS NOT ATTAINABLE FOR AN EXTENDED PERIOD OF TIME:
This reigns true in both investing and in selecting national champions. Two years ago, Warren Buffet offered 1 billion dollars to anyone who could pick the perfect NCAA bracket. To date, nobody has stepped up to claim the prize. To parallel this challenge, Mr. Buffett bet a certain hedge fund manager that a simple S&P 500 Index fund could outperform a selection of top hedge funds. So far, the index fund is on top.
A COMMON DENOMINATOR FOR SUCCESS IS A GOOD COACH:
A coach can often make a significant impact on the outcome of the game. Whether it is developing a strong defensive strategy, managing a player’s emotions, or calling a crucial time-out, great coaches find ways to minimize the things they can’t control, and maximize the things they can control.
The song titled, “One Shining Moment,” plays at the end of the NCAA tournament commemorating all the teams who participated. Our goal at Soundmark is to be the trusted coach that guides folks in looking beyond the “top seeds” and “underdogs” of the shining moment, and instead offer our clients the tools to be truly successful in reaching their life goals and dreams.