March Madness and Investing
My favorite annual sporting event is the NCAA Men’s Basketball Tournament. I’m writing this during the first weekend and, wow, what a truly mad season it’s been so far. #13 Buffalo beat #4 Arizona, play-in Syracuse beat #3 Michigan State, and Texas A&M beat #2 UNC. Then, in an upset for the history books, the University of Maryland, Baltimore County (UMBC) Retrievers trounced UVA, the #1 team in the country. Never has a #16 underdog beat a #1 seed in the men’s tournament … by 20 points, no less!
How is a March Madness pool like investing? Well, it isn’t – or at least it shouldn’t be.
Some folks feel otherwise. They consider both March Madness and investing as a gamble and zero-sum game. It’s true that in both situations you put up money with the hope of getting more back. But, let’s face it, that’s where the similarities end. A successful investor and NCAA tournament pool player don’t have much in common. To win the pool you need to be lucky – very lucky. The essentially unpredictable results of 63 games must go in your favor. To win in investing, you need only to apply a little science, using diversification laced with discipline and patience.
Pool “investing” is a zero-sum game. The winner(s) will capture 100% of the losers’ stakes.
Real investing is different. In theory, all investors can make money. You see, unlike a March Madness pool, companies you invest in are producing durable goods and services, which are expected to generate profits for every shareholder. As the economy expands (as it has done on average throughout history), so do aggregate company profits and investment gains.
The other difference between investing and playing an NCAA pool? Playing the pool is fun and honestly investing, done right, is boring.