In our last post, we outlined three key investing lessons that can be gleaned from the upcoming NCAA Tournament.
Lest you thought we were done on the matter, here are four more things we can learn from years of failed March Madness brackets.
The old trading axiom also applies strongly to picking your bracket. For the purposes of the NCAA Tournament, the teams that have the best momentum are those that won (or at least advanced far) in their conference tournaments the week prior.
A breakdown of how conference champions perform in the tournament by NCAA.com found that over the last 25 years, 12 of the 23 national champions were also conference tournament champions. In that span, not a single national champion failed to reach their conference tournament semifinals.
What does that tell us? It can pay to ride the hot hand. Momentum can be a powerful thing.
Humans are emotional beings. Expecting to make a decision—let alone one involving their portfolio—without factoring in emotions is unrealistic for most (after all, being emotionless is itself a state of emotion).
The best investors (and bracketologists) learn how to manage those emotions and prevent them from having too heavy an influence on any one decision. This is, of course, easier said than done, especially when you’re choosing between your alma mater and the #1 overall seed.
Ultimately, it’s your prerogative if you want to let your emotions dictate your portfolio decisions. You may even get lucky and pick some winners. But this is not and has never been, a sustainable strategy.
In that same vein, it pays to be aware of as many of your own biases as possible. In 2015 the New York Times analyzed its reader’s NCAA Tournament picks compared to model estimates.
What they found was that Times readers exhibited biases towards teams in the Northeast (where there is the heaviest concentration of readers), teams from strong academic schools, and teams that have either a recent or historical track record of success in the tournament.
These biases were most likely subconscious, but that doesn’t make them any more real. We all have our own biases in the markets, whether it be towards a particular asset class, sector, or fundamental characteristic. Being aware of such biases can prevent your portfolio from becoming too correlated to any one market force.
Prior to last year’s tournament, every one of these types of articles likely included the tidbit that no #16 seed had ever beaten a #1 seed.
We all know how that turned. The University of Maryland-Baltimore County’s upset of Virginia in 2018 shocked the world and underscored just how chaotic the tournament really is. There was no logical basketball reason to think the Retrievers could upset the Cavaliers, and yet it happened.
It was a valuable lesson for everybody: just because the sentiment is leaning 100 percent in one direction, does not mean the outcome is predetermined. Keep that in mind next time sentiment gets too one-sided.
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