The 2019 NCAA Men’s Basketball Tournament is nearly upon us, which means it’s time to put away our spreadsheets for a second and whip out our brackets.
Sure, we won’t officially know who’s in the field of 68 until March 17, and the tournament doesn’t technically start until March 19, but I’ve already got the fever over here (or maybe the Lightspeed Chicago office is still delirious from Loyola Chicago’s run to the Final Four last year).
In any case, we’re going to have a little fun with this week’s post. As a loyal steward of both the markets and college basketball, here are some investing lessons that we can apply to both our portfolio and our brackets.
(This is the part where I remind you that these are fun comparisons made in the spirit of March Madness. You should absolutely not make any portfolio decisions based on the tactical decisions of Mike Krzyzewski, as if that needed to be said).
Do you know how many times all four #1 seeds have advanced to the Final Four? One. It happened in 2008. And only five times have three #1 seeds advanced to the national semifinals.
In other words, we can’t just rely on the favorites. Upsets happen, and the best brackets account for this by not picking “chalk” all the way through.
The same goes for investing. Mega-caps like Apple, Amazon, and Microsoft can anchor a portfolio, but they shouldn’t account for your entire asset allocation. In the last 15 years, large-cap stocks have never been the top-performing asset class. Even in years in which large-cap equities dramatically outperformed the benchmark, they were eclipsed by the performance of assets like REITs, small caps, and high-yield bonds.
In NCAA brackets, correct predictions are worth more in the later rounds than the earlier rounds. A typical bracket scoring system rewards only one point for a correct first round prediction but might reward 64 points for correctly predicting the national champion.
In other words, the long-term is more important than the short term. Would it be great to be that person who called the most improbable upset of all time? Sure. But picking the eventual final four and national championship games is going to have a far greater impact on the performance of your bracket than even a perfect 32/32 showing in the first round would.
Think of your portfolio the same way. Investing is a marathon not a sprint, and the best way to win is by sticking with winning investments over decades, not fretting over every volatility spike.
If you think looking at Ken Pomeroy’s strength schedule rankings for the fourth time is going to help you finish at the top of your office pool, maybe it’s time to step away from the computer.
We’re all prone to analysis paralysis. Who among us hasn’t re-read an earnings call transcript or held off on hitting the buy button until we do just a little more research?
This is an understandable reflex, but it can become counterproductive to a point. The longer you sit on a decision, the smaller your window of opportunity gets. If you were one of those investors waiting for the market to pull back even harder in December and January, well, you missed your chance. Those who made the decision to buy in that moment have enjoyed the gains of 2019.
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Disclosure: The author holds no position in the stocks mentioned.
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