March Madness & Investing....
The NCAA College Basketball Tournament is one of the most exciting sporting events of the year. “March Madness” (as it is referred to) includes 64 teams that are selected to play in a “win or go home”, single elimination tournament. Teams are divided and ranked 1 through 16 in four respective brackets. Higher seeded teams play lower seeded opponents and play until there are finalists in each bracket. The “Final Four” represents the last four remaining teams who play in two semi-final games; the winners of those two games play for the national championship. Each year there are incredible and shocking upsets, creating amazing “Cinderella” stories where a low ranked team beats a higher ranked team and advances farther than expected. As with this year’s tournament (..along with nearly all prior ones), March Madness not only provides fun and excitement, but also important lessons that we can compare to investing.
Lesson #1: PLAY TO WIN instead of playing…not to lose! Arguably, the biggest upset this year was #1 seeded Purdue losing to NJ’s FDU (Fairleigh Dickinson University). As the game progressed and stayed close into the final minutes, it was hard to ignore how the heavily favored Purdue team started to lose confidence and began to play more and more tentatively; instead of playing to win, they started playing “not to lose”….Hesitating, overthinking every shot and pass. Investing can be similar: When we make investing decisions, we can’t be afraid to lose money; we can’t second guess ourselves. More often than not, this will lead to bad decisions. We must have conviction in our investments and play to win!
Lesson #2: Expect the unexpected. Not one #1 ranked team made it to the Final Four this year. The Final Four was comprised of one 4th seed, two 5th seeds and a 9th seed! So many upsets! First, we should always know that markets can trade irrationally in the short term (even though so many pundits think they can “predict” every short term outcome!) But second, what may have been a “winner” in the past, does not mean that it will lead now. And while the best investments will not always perform the best every year, generally quality will win out over time. Just as it may be unlikely that ALL the number one seeds will make the Final Four in any year, it is even more unlikely (this year notwithstanding!) that at least one number one seed will NOT make the Final Four.
Lesson #3: Coaching matters! A great coach goes beyond the X’s and O’s. A great coach finds ways to get his players to believe in the team and the game plan, keeping the team focused despite any adverse conditions that they may face. The FDU coach found a way to get his kids to believe they could beat Purdue. For those that do not follow college basketball that closely, Purdue was such a heavy favorite that if they played 100 times, I would expect them to beat FDU 99 times. As financial advisors, we also have to coach our clients to believe in our plans and strategies and guide them, especially during the most stressful times---which is usually when markets are sliding. The advisor/client relationship is important because if the client does not trust in the strategy and the advisor then the plan will most likely fail at the most inopportune time.
Lesson #4: Good LUCK and good STRATEGY are not the same. Every year someone has the bragging rights as the winner of the March Madness office pool, just like every year some random money manager is the top performer. However, in both cases it is extremely rare that both or either of these winners will continue to repeat year after year. As an aside, I picked UCONN to make it to the championship game (which they did)…Probably just good luck on my part. Unfortunately, I also had Arizona in the championship game, and they lost in the first round! But this is similar to what we listen to at social events; we hear about “investment winners,” but rarely do many speak of their “losing picks.” No one ever loses money in Vegas…..but yet somehow those fancy hotels are still there.
Lesson #5: There’s always next year. Had a bad year with your bracket picks? Oh well, you can start all over again with a clean slate next year. However, investing is cumulative, the stakes are much more important and big mistakes can take a long time to overcome. You can take risks with picking big upsets in your bracket, but taking unnecessary risks with your portfolio can set you back for a long time. Again, here is where the value of a coach/advisor helps. Sometimes the best value we can provide is steering our clients away from making big mistakes.
In summary, when you are picking brackets, sometimes the only way to be the big winner is to take big risks---and picking the underdogs can often be more fun. However, when it comes to investing, a better game plan is to take a measured and disciplined approach. Focus on the goal of balancing risk and expected returns and your odds of success will improve dramatically.
All the best,
NCM Capital Management
Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.