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March Madness

By Jim Miller, CFP, Senior Trust Officer

The NCAA college basketball tournament is well known for the “office pool” whereby many of us with very little basketball knowledge place our bets on which of the 64 teams will get to the “Final Four.” We draw on a number of different sources—emotional favorites, tips from friends and family, and the past year’s track record.

Since many activities in my life take precedence over the NCAA basketball tournament (family, work, friends…) I generally devote about 15 minutes to the selection process. My research is limited to listening to blurbs on the news and overhearing conversations among co-workers. As a result, I know very little about the teams. I combine the results of this research with the information provided when the “brackets” come out, listing the teams competing, their season’s record and whom they play in the opening round. The key criteria I use to pick the winners are rankings and geographical location (I favor mid-western teams, having grown up there).

Many individuals select their investments very much the same way I forecast the Final Four. And all too often the results are disappointing. We informally gather information from a variety of sources and combine this information with our best guess as to what will be the best performer. We often place too much weight on recent performance without understanding what produced that performance.

Below are a few lessons I’ve earned from the NCAA tournament that can be applied to investing:

  • Teams that are well-coached and follow a carefully constructed and disciplined game plan usually win over the team that depends on the performance of one key player. When the star player is hot, there is no stopping the team. But on a bad day or if the star is injured, there is no one to step in and pick up the slack. A better approach is to have a number of skilled athletes who play well together as a team.
  • Investment programs that focus on one type of investment or style of investing will experience significant ups and downs. A better approach is to diversify among a number of different types of investments that complement one another. The result will be more predictability and better long-term results.
  • It’s critical to understand the details of the win/loss record, not simply how many games were won. If a team won most of its games but played few top teams, they probably won’t do well against a team with a less impressive record that had a very tough schedule.
  • An investment with a history of high returns is only meaningful if you understand what the factors were that contributed to the performance and have confidence that these factors can be repeated. It is critical to isolate performance resulting from luck (which can’t be repeated) from that generated by a disciplined process (which can be repeated).
  • Basing decisions on emotional factors has resulted in consistently poor results. Having grown up in the Midwest, my selections are heavily weighted toward teams from that region. I also like to root for the underdog and often select teams that are a long shot.
  • Emotions are an essential part of being human but we need to make every effort to remove emotions from investment decision-making. The emotions of fear and greed often tell us to sell investments when they are at low levels and buy when they are at all-time high prices—the exact opposite of what we should be doing.

There is a reliable formula for investment success that we have built into our investment program at Merchants Trust. Key ingredients include diversification, in-depth research and a disciplined process.

Unfortunately, a reliable formula for success in predicting winners in the “Road to the Final Four” continues to elude me.

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