This is a great time of year for sports. We just had March Madness in college basketball. The Masters gave us the first golf major of the year. The baseball season is underway. And, the NBA and NHL are finishing round 1 of the playoffs. I’m sure many of you reading this have put together a March Madness or playoff pool at some point in your life.
The thrill of watching your team excel or go further in the pool just adds to the excitement of the event. You can relate the strategy and results in pools to investing, in 3 similarities.
- Picking winners is hard. The probability of picking the winner of a 64 team basketball tournament is extremely low, similar to beating the market on a consistent basis. Most professional money managers do not beat the market in a typical year.
- An informed approached improves your odds. In March Madness, the selection committee ranks all 64 teams. There are 4 regions and each of the 16 teams are ranked 1 – 16. If you were to pick the top seeds every year, you’ll likely win more games than most. You may not win the pool, but will probably rank higher than most competitors. With investing, you can take an informed approach that relies on decades of academic research and invest in the market as a whole. You may not outperform a specific stock in a given year, but over time, you’ll put your portfolio in a better position to earn close to 10% per year (S&P500 in USD from 1926 – 2022).
- Good luck and good strategy are not the same. Every pool will have a winner, just the same as a particular money manager will have the highest return in a given year. In both cases, this will likely not be the same person year after year. For every person that brags about their winning stock pick, there is a person that picks the unlikely upset in their pool. Congratulations, you got lucky.
Participating in pools is fun. It keeps the engagement level high and adds another element of potential victory to the event. That said, I think it’s important to highlight a key difference between pools and investing. You may need to take a big risk in a pool – pick an extreme underdog – to win. However, it is better to follow a disciplined investing strategy to pursue higher returns while reducing your risk.
