Chuck Jaffe: Investing to many like filling in NCAA brackets
Picking a bracket and an investment portfolio can be strikingly similar.
Whether they talked to friends, scanned the Internet or listened to talk radio, it's clear that a lot of people spent more time recently selecting their NCAA basketball tournament bracket than they'll spend thinking about their investment selections in a year.
Listen to how people actually filled their brackets, however, and it's not all that different from how they fill their investment portfolio, a frightening thought when you consider how few people are contending for the crown when the tournament is nearing its conclusion.
Picking a bracket and an investment portfolio can be strikingly similar. While avid fans spend the entire college season figuring out who deserves their support come March Madness, the average guy is picking with limited knowledge. They might know their favorite teams — and might pick those squads even when they have a lesser chance of winning — or be familiar with who is in ranked or comes from the best leagues, but they're not well versed on schools they've barely, if ever, heard of.
It's the same for average investors, who pick investments every now and then, based on what's available in their retirement plan, or because they have cash to put to work, or because they heard a hot tip or got a sales pitch that sounded good. Investing is always in season, and if you don't spend the time familiarizing yourself with the teams, it's hard to pick winners.
By comparing the way you picked your portfolio to the way most people pick brackets, you may learn something about your investment style, and particularly what you need to do to be competitive every year in investing's "Big Dance."
• Strategy: Chalk
In tournament parlance, this means going with the favorites, taking top seeds pretty much straight down the line. In investing, it's going with big names, top ratings and established records.
It's a relatively safe strategy. In 2008, all four top regional seeds made the Final Four, so a chalk bracket would have been spot on, but last year's Final Four teams were seeded 3rd, 4th, 8th and 11th.
As an investor, if you go chalk, you must be willing to let the strategy work, knowing there will be times (like last year) when it doesn't, but that it keeps you close in most years. In 18 of the last 30 years, at least two top seeds reached the Final Four — and only twice did a Final Four feature no top seeds — so betting safely has been successful, if not exciting.
• Strategy: Underdogs
Everybody loves an upset so — while common sense rules most selections — you spice up the bracket with a few schools who have done something to give you a hunch they'll succeed.
Picking longshots can be a feast-or-famine strategy. If you pick all of the first-round upsets right, but can't pick a single team that makes it to the Final Four, you're not winning the pool. There's not enough points in being right in the first round, and talent typically carries the day as the tournament continues.
In investing, this strategy typically involves going with issues that have been hot, hoping you can ride them to profits and be gone by the time they fizzle out.
• Strategy: Follow the experts
Since you don't follow the teams moment by moment, you find someone who does. Alas, it's hard to remember which guy from, say, ESPN has a track record of picking well and who just talks loud enough to grab your attention when you're trying to sort one blowhard from the next.
Likewise, investors rely on what they see from some talking head, hear on a radio show, or read on the cover of a personal finance magazine at the time when they're looking to make a move. The stocks or funds that generate the best clips or sound bytes become the pick.
The problem is that most investors don't know the expert's strategy, or how that point of view fits with their own, and they take the expert's word without doing more research; worse, they live with the results, while the expert moves on to the next pick.
• Strategy: The data tells me ...
If you follow along, build the expertise, look at the rankings and ratings, understand the various weights and measures and plow hours (or months) of painstaking research into it, you can come up with your own formula for the perfect bracket.
This is the guy who sounds best at the water cooler, even if he never collects the winner's cash.
An investor should know and use the available tools they are comfortable with but, at some point, they have to apply their own intuition. Relying completely on the data has led many investors into a portfolio of highly rated funds that hasn't made them happy; every issue was picked for a reason, but trusting and believing an investment typically is about more than past results and ratings.
• Strategy: Lottery ticket
This involves following every strategy, picking as many brackets as possible, each different from the next by anywhere from a tweak to an overhaul. They'll have a chalk bracket, an underdog bracket, an experts bracket and data bracket and everything in between, figuring that something will win and make up for the extra losses incurred be entering so many times.
From an investment standpoint, you could say that at least the person who takes this strategy is diversified, but the problem with taking a "little bit" of multiple strategies is that it's possible to get the worst of each, or to have the bad cancel out the good.
• Strategy: The "name game" (or the "fame game")
Whether you like tough nicknames or goofy ones — Go Unicorns! — some people pick teams by name, mascot, color scheme or anything but the product on the court. Likewise, some people just pick name brands, famous teams from big-name conferences, even though some of those schools may have been also-rans in the sport for decades.
While you'd like to think investors aren't this flip about selections, some are. People want to invest in funds where the name makes them comfortable or adventurous or where the firm sounds prestigious; they like the brand-name companies, even when looking at those firms' stinkers being offered up in a retirement plan.
If your research is only skin-deep, you probably won't have to wait too long to see just how far down the ugly is.
Chuck Jaffe is senior columnist
He can be reached
or at P.O. Box 70,
Cohasset, MA 02025-0070.