Investing Lessons from the Forgotten March Madness
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In this time of global crisis, thoughts of the now-canceled NCAA “March Madness” basketball tournament may be the farthest thing in our minds. But concerns for your clients’ financial futures have been heightened by the recent volatility. My article, which I wrote before the coronavirus crisis, reflects on a valuable parallel between predicting a national champion and achieving a desired investment return.
The widespread popularity of the NCAA tournament is not just about the games, the schools and the players, but just as importantly, it is about the brackets. Brackets refer to the office pools based upon correctly predicting the 67 tournament games. Having the most points in a pool garners bragging rights and, in many cases, your colleague’s cash.
The art, science and guessing involved in filling out a tournament bracket provides insight into how investors select assets, structure portfolios and react during volatile market periods. Before I explain, answer the following question:
When filling out a tournament bracket, do you:
- Start by picking the expected national champion and then go backwards and fill out the individual games and rounds to meet that expectation?
- Analyze each opening round matchup, picking winners, and then repeat the process with your second round matchups until you make your best guess at who the champion will be?
If you chose answer A, you fill out your pool based on a fixed notion of the best team in the country. In doing so, you disregard the potential path, no matter how hard, that team must take to become the champion.
If you went with the second answer, B, you compare each potential matchup, analyze each team’s respective records, strengths of schedule, demonstrated strengths and weaknesses, record against common opponents and even how travel and geography might affect performance. While I may have exaggerated the amount of research you conduct, such a methodical game—by--game evaluation is repeated over and over again until you conclude which team can win six consecutive games and become the national champion.