As the NCAA tournament wraps up, many sports fans are reflecting on their brackets, winning their office pools, and bragging rights with friends. Similarly, others focus on their investments and trying to predict which stocks will perform the best. We may think of these as two separate worlds, but there are numerous similarities between the two.
Research is important as you perform a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats). For example, a team like Purdue may have a skilled “big man” who gets a lot of rebounds, but they could be vulnerable if the shorter teammates can’t play well enough to support the team’s strength. Investing in high-risk stocks may offer potential for higher returns, but a greater chance of loss. Similarly, picking unlikely upsets may yield a larger pay off if your picks win but introduces a higher risk to your bracket’s success. In seven of the last eight NCAA Tournaments, a 9-seed or higher has made the Elite 8. That doesn’t mean we should only have 9-seed or higher teams in our brackets’ Elite 8, but having at least one is a good idea.
We have to make decisions based on available information. This means we have to think about the potential for a team (or stock), based on past performance, statistics, and other factors they may not control. I believe Texas is one of the top teams in the nation this year. However, I didn’t have them going very far in my bracket because of the things outside of their control: the teams they would potentially have to play. Despite how much confidence we may have, there are no guarantees of what the future holds. There could be supply chain disruptions, inflation that pushes cost of inputs higher, or new competitors, just as there could be basketball injuries, foul trouble, or a poor defensive night. We must diversify our approach to potentially stack the odds of winning in our favor.
There are also several differences between brackets and investment philosophy. Namely, the complexity of researching a team’s basic statistics and rankings is far less complex than reading financial statements, tracking market trends, and reviewing economic indicators. We have continued control over our investments: when to buy and sell, whether we choose to be passive or active, and when to change the allocation. The bracket is set and locked from the start of the first game, so we have to watch everything play out without the possibility making adjustments along the way.
We must recognize that there are elements of skill and luck involved. There are people who win the lottery, just as there are individuals who win their company bracket pool by picking their favorite mascots to win. If you picked the owls to make it into the Final Four, congratulations! Investing is usually a long-term endeavor meant to generate wealth over time, whereas brackets are short-term focused with outcomes determined in a few short weeks. If your bracket busted early, there is still hope for your investment portfolio to be long-term focused. Pick up the phone and call your advisor today to make sure your plan is a slam dunk.