I’ll admit it; I love March Madness. Even if I have a million problems with the way the NCAA runs its business (and, it is a business). As long as we are all losing precious work hours checking in on our brackets, we might as well learn something. CNBC / Grow asked me to write a piece about market lessons you can learn from March Madness — and specifically, from filling out your $5 brackets. You can read the entire piece over at Grow’s website. But here’s a taste, along with a couple of bonus tips:
Don’t get seduced by underdogs.
For the one or two of you who don’t remember, the UMBC Retrievers were the lowest-seeded team in the tournament last year—but beat top-seeded Virginia in the first round. They were the first-ever 16 seed to beat a 1 seed.
Hasn’t this been happening a lot lately? Aren’t there always big upsets? Shouldn’t you pick lots of teams (and stocks) that are underdogs?
Fairy-tale runs stick out in your mind, like stories about that friend of a friend who bought stock in that crazy Seattle-based online bookstore 20 years ago and made $1 million. Such Cinderella stories stick out because they are unusual. Behavioral scientists call this “availability heuristic.”
Last year, according to the NCAA, 8 percent of bracketers picked a 16 seed to win a game. They were not geniuses. They were lucky: Historically, 16 seeds have a 1-135 record in the tournament.
Last year, according to the NCAA, 8% of bracket-ers picked a 16 seed to win a game. Many of them probably felt like geniuses. They were not. They were lucky. Historically, 16 seeds are 1 and 135 in the tournament. Since the NCAA tournament expanded to 64 teams in 1985, 1 seeds have played 569 games throughout the tournament. They have won 454 of those, for a ridiculous win percentage of 79.8.
If you won 80% of your investment bets, you’d be pretty happy.
Just because someone got lucky doesn’t mean you will. Stick with the odds.
Stick with blue chips Sure, those spunky Retrievers made it into the second round last year. And people who bet on them did well…for one weekend. People who rode other underdogs looked good for a while, too. But in the end, the Final Four is all about favorites.
Since 1985, there have been 34 national champions – 20 have been a 1 seed. There were 68 spots in those championship games — 1 seeds have taken 32 of them (47 percent). There have only been eight championship games that did not feature a 1 seed.
On the other, other hand, some blue chips are overrated. Hey, I’m not one for conspiracy theories, but Duke and Kentucky are pretty good for TV ratings. Is the tournament selection committee likely to over-seed those teams? Some say so. They certainly have a leg up because of all those nationally televised regular season games. So there’s a trading opportunity for you — akin to finding hidden value in an industry or a stock that’s overpriced. A few years ago, I made an NCAA Tourney over-rated index, dinging teams who underperformed their seed – such as a No. 2- ranked team failing to make the Sweet 16 round. You can check my methodology here, but the conclusions was that since 2000, Duke had underperformed its seed twice as much as any other major program. So, if you “sold” Duke through those years, you got ahead. Remember, past performance does not guarantee future results, and the two times I’ve won pools, I’ve picked Duke. Still, Over-seeding is a real phenomenon.
Finally, you don’t have to get every pick right. Just the big ones. If you get six of those Elite Eight games right, and three of the Final Four right, your odds of winning are pretty high – regardless of how much better Phil from accounting did on the first day. In last year’s ESPN online pool, which involved millions of entries, the ultimate winner only got 27 games right out of 32, and was only 51-12 (81%) overall. But the bracket did have three of the Final Four, and got the champion and the runner-up correct.
What does this mean for investing? Saving for retirement is about the long game. Don’t get too high if things go well at the beginning and too low if they go badly. March Madness is actually decided…in April. Don’t sweat the small stuff, just get the big stuff right, and keep your eyes on the big prize. Whatever that means for you.