March Madness and Mad Money

March 1, 2016

The season is upon us.  Countless hours will be spent (or wasted) across corporate America trying to figure out the NCAA basketball tournament bracket.  Some will do extensive research, dig into analytics, look at what teams the professionals are picking, and figure out their best bang for the buck with their own scoring system.  Others will fill out a bracket in less than two minutes or pick based upon some simple metric, like what team mascot is better.  In the end, it is a game of chance.  It is gambling.  If you win, it’s dumb luck.  If you lose, it’s dumb luck as well, just the wrong kind of it.

Oftentimes many think of the investment world in these very same terms.  It seems like a game of chance.  You can do research, or you can refrain from it.  In the end, you make your picks and hope for the best.  It feels just like the brackets and gambling.  But is that true?
Clearly the answer should be no, however, due to the actions people take, the answer can unfortunately be yes.  Why is that?  Because you:

  • Try to find a “sure thing” based upon a hot tip – For example, my dentist just made a killing on a healthcare stock. I should do that too!
  • Rely on recent trends to predict what is going to happen in the future. Oil prices have been dropping, so it should keep going, right?
  • Say “it’s different this time” – This often causes us to shake off a cold reality. We know market timing doesn’t make sense, but when the next new event comes up, like North Korea and their nuclear testing, we say this has never before happened and discard whatever the past tells us.
  • Professionals are Proven – Believe that if someone is an investment professional, they have the ability to outsmart the markets. Their crystal balls are cloudy too!
  • Player vs. Team – Think about the investment and not the portfolio as a whole. Like in basketball, you can think of who has the best player versus who has the best team.
  • Make all or nothing bets. You think the market is going to go down so you go all to cash.  That means you are 100% confident that the market can go absolutely nowhere but down.  Are you that sure?
  • Don’t look for evidence that contradicts what you have found to be true. You make a decision and instead search only for evidence to back you up and make you feel even more confident.
  • Try to make your losses back quickly. Many people say “I lost money last year, and to get back on track, I need to do better this year.”  The problem here is that you try to exert control over the markets, which by their nature are uncontrollable.  The markets will give back, but it takes patience.
  • Understand that sometimes you do lose money, and that’s okay. In fact, it’s necessary.  You never win them all.  But it’s like the NCAA regular season.  You don’t need to win them all to get into the tournament.

On the contrary, a successful investment strategy looks much different than the above.  Instead of relying on short-term guesses, you need to rely on long-term strategies.  Winston Churchill once said “The farther back you can look, the farther forward you can see.”  This lines up firmly with a strategy which works over time, not every time.  There’s no such strategy that works every time.

So as you look at your portfolio, think about not just what has happened this week, this month, or even this past year.  But think instead about the strategy.  The strategy of putting a winning team together:  Talent, teamwork and time together.