Get Ready For March Madness!
Tomorrow marks the official start of the 2017 NCAA Basketball Tournament. What do bracket-picking and investing have in common? Answer: Your skill in analyzing and distinguishing the winners from the losers. Here are a few tips that may help you win the office pool and create a profitable investment portfolio!
Most people have a method for approaching March Madness. Every year around this time, they put that method into practice – and then promptly forget about it until the following year. But, those same skills and strategies could help you select better investments year round. Let’s take a look at some of the lessons that carry over from "picking brackets" to "picking investments."
Beware of Risky Long Shots
Everybody loves a long shot, right? But when the dust settled after the 2016 tournament’s first weekend, most of the long shots we’d heard a lot of hype about were gone. The Final Four teams consisted of Villanova, Syracuse, North Carolina, and Oklahoma – none of which were considered long shots.
Picking the underdog can be fun – especially when that team wins! But when it comes to your portfolio, choosing the underdog rarely meets your investment goals. Just like small teams that miraculously rise to the occasion, stocks can enjoy a spectacular run. More often than not, though, they quickly fizzle out. Despite a strong initial public offering, thousands of stocks ended up taking a nosedive and dropping 80 percent or more from their all-time-high price over the last 20 years.
The lesson is: Don’t overload your portfolio with long shots. There may be a lot of hype surrounding a particular investment, but you still need to perform your due diligence. Does the company have a sustainable business model? Is there too much debt on the balance sheet? These are the types of questions you need to answer to ensure you don’t get caught up in the hype.
Core Positions Can Be Like Highly Ranked Teams
High-profile programs like North Carolina and Duke are well-established candidates, but over the last several years we’ve seen smaller programs like Virginia Commonwealth University and Butler emerge as contenders. Today, it’s difficult to win a pool by picking just the favorites. You’ll also need a few picks from outside the major conferences. Select wisely and limit your underdog picks!
Similarly it’s difficult to earn a higher return on your investments by picking only established, large-cap stocks. To increase the potential expected return to your portfolio, add a few mid- and small-cap stocks without compromising your core positions. By investing in a variety of companies of different sizes you also increase the diversification of your portfolio.
Experience and Good Leaders Are Key
The top seeds in this year’s tournament will likely have a combined winning tournament record. This isn’t just chance. Typically they have the best players and highly experienced coaches. It’s important to pick teams with a solid foundation and a history of consistent performance, plus excellent leaders who can make adjustments on the fly.
This is true for investing as well. A strong management team is essential to any successful company. What should you look for? Length of tenure is important. The longer the tenure, the higher the probability the team is committed to the company. The company should also have good corporate governance.
Emotions: Leave Them Out of Your Game Plan
Humans are emotional creatures. But when it comes to brackets and investing, it’s wise to avoid making emotion-driven decisions. Many people are tempted to pick their alma mater to win. Loyalty is a commendable trait, but relying on it for bracket picks is not a smart idea. Home bias just isn’t a realistic strategy for winning.
The same goes for investing. Making decisions based on hopefulness, familiarity, anxiety or fear will likely do more harm than good. If you’re going to do your own investing, you’ll need to master your emotions. This isn’t easy. It’s extremely difficult to emotionally detach from your money. Ensuring that your investing is based on solid research and evidence and that you always remain focused on a good long-term investing strategy is a better approach.
Many investing lessons can be learned from March Madness. Picking the perfect bracket, just like picking the perfect portfolio, is essentially impossible. However, the general principles that carry over will help you stay out of trouble in the investing world all year long.
Anthony Bykovsky, CFA, is a Portfolio Manager at Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Anthony at firstname.lastname@example.org.