Content Provided by Scott Kubie, CFA, CLS Chief Strategiest
When I was teaching at the University of Nebraska Omaha, I always enjoyed contrasting March Madness strategies with investment strategies. March Madness is an interesting contest because it takes place over a short time, but not too short of time. You can analyze your strategy and compare how you do at various stages. People ahead of you are always dropping by to ask what you think of the tournament, so the feedback loops are very strong.
In case I get back in the classroom soon, I want to invite you to add to my list of similarities and differences between March Madness and investing. Below are some of the key ones I used with my class that help govern my NCAA tourney strategies.
Similarities:
- Think risk-reward: 8 & 9 seeds beat each other about 50% of the time and then almost always lose to the #1 seed. In our company contest (no entry fee required) you get an extra point for the difference between seeds for an upset. That means two points for the nine and one point for the eight. Pick the nine.
- Experience matters: NCAA champions that weren’t number one seeds generally come from schools rich in basketball tradition. Look for a track record over the long-term, not just the last season.
- Be contrarian: Yahoo data shows about 28% of brackets have Louisville winning[i]. Louisville may be the most likely winner, but the competition will be tough. You probably have to pick the runner-up right to win in a large contest. Duke is favored by only 7%[ii] of contestants. You might be able to win that contest without having the other half correct.
Differences
- There is no difference between fourth and 204th in an NCAA Tourney contest. If prizes are only available for the top three spots, a person who finishes fourth three years in a row never earns a dime. If an investment manager put together the same track record, they would be the best manager over that period. Of all the similarities and differences, this is most important.
- The reward for high risk picks in the NCAA tournament is much higher than in investment management.
- Playing favorites can make picking more fun. I always pick Creighton and Kansas to do well. They are my favorite teams in the bracket and having a favorite team makes watching games more rewarding. The same is not true for investing.
Those are my top three in each set. Which ones can you add?
Oh, and go Blue Jays and Jayhawks!
[ii] http://tournament.fantasysports.yahoo.com/t1/group/all/pickdistribution?round=6&tid=1722957
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0687-CLS-3/22/2013