A March Madness Investing Lesson
It’s March, which means millions of Americans are spending or wasting, depending on your point of view, many hours watching and discussing college basketball. It’s tempting to think that this crazy period where loveable underdogs and mighty powerhouses battle for glory on the courts is only about sports. But maybe not. A financial reporter at The New York Times accomplished something impressive during this basketball-crazy season when he managed to look at the teams that his newspapers’ readers picked to win games in the March Madness bracket and tied it to an investing lesson. Before revealing the investing advice, you need to know what the journalist used to generate his financial story. The reporter took a look at the March Madness predictions of the newspaper’s readers and found a clear bias towards certain kind of teams. New York Times’ readers tended to favor teams that exhibited one or more of these traits:
- They were based in the Northeast, where the heaviest concentration of subscribers is located.
- They were academically elite schools.
- They have enjoyed recent success in the tournament or enjoyed a long track record of excellence.
The newspaper readers’ picks, however, diverged from the predictions of the statistical experts at FiveThirtyEight and two highly respected number geeks who use statistical techniques to handicap college basketball games.
Readers' Picks vs. Experts
Here are some examples: St. John’s University (Located in Northeast) Fifty percent of NYT readers picked this New York school to win the first round over San Diego State University. The experts, however, estimated that St. John had just a 44.3 percent chance of winning. Michigan State (History of NCAA success) Seventy-six percent of NYT readers picked Michigan State to win in the first round, but the statistical model predicted Michigan State had a 64.3% chance of winning. UCLA (Academically elite/history of NCAA success) Forty-four percent of NYT readers picked UCLA to win the first game while the expert models estimated success at 38 percent.
Investing and March Madness
So how does guessing the results of basketball games tie in to investing? Due to human nature, Americans are more likely to favor investments that they know about or think they know. Growth stocks are an excellent example. It’s more fun, and investors believe it will ultimately be more financially rewarding, if they pick brand name companies whose products that are widely used. Companies like Google and Apple. Even though conventional wisdom suggests that the growth-stock category generates the highest investment returns, it's not true. In reality, the investing category that has generated the greatest returns over the decades are obscure companies that toil in unsexy industries. These are broadly called value stocks. Inclusion of multiple categories, such as both value and growth stocks, improves diversification and gives investors a greater probability for long-term investment success. When investors pick investments based on popularity, rather than following a disciplined strategy, this can be a risky endeavor. Or as the journalist who came up with this March Madness tie-in noted, tourney picks "may be all fun and games. But when saving for retirement, the consequences of letting familiarity, rather than clearheaded analysis, guide your decisions, can be quite a bit more costly."
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