You can tell that it’s mid-march because, as happens each year, all eyes will be glued to the TV for March Madness-NCAA Basketball tournament for the next few weeks. Even non-basketball fans get caught up in the hype, for who doesn’t like a good underdog story or the thrill of a last minute victory on the most unlikely shot? Then there is the term bracketology, a word not listed in Webster’s dictionary online but clearly a word attached to this event. So much so that Wikipedia’s definition reads: Bracketology is the process of predicting the field of the NCAA Basketball Tournament, named as such because it is commonly used to fill in tournament brackets for the postseason.
Some will pick winners based on pure speculation; some will use pure technical analysis of players, coaches and opponent match-ups; some will use environmental analysis such as game location and some will pick winners based on who has the momentum going into the tournament. A select group will combine statistical analysis called the quantitative approach with the external factor analysis or qualitative approach, to complete their brackets.
Is the excitement of March Madness transferable to investing? What if there was “January Madness”, where at the beginning of each calendar year you filled out your bracket of top stocks for the coming year, ranking them based on who you believe will out- perform the others. The first round should pair the two top competitors in each industry/sector. Then the competition would move to cross industry match ups. I wonder if the champion of “January Madness” would have earned the title based on statistical performance alone or been the benefactor of overall industry performance or some combination. Did the champ turn out to be an “underdog” company (team) that did not look like they should do well but did anyhow? How does that result occur?
So how does one “pick the winners?” I heard a commentator on the radio the other morning say that the odds of picking all the winners in the basketball tournament (the perfect bracket) were upwards of 5 billion to 1. The odds of this happening are so remote that Warren Buffett has a contest that rewards a perfect bracket with a prize of $1 Billion Dollars!
The moral of the story is twofold:
1) The chance of picking all winning stocks (or any investment) like picking all winning teams in the NCAA tournament is very small.
2) Using a multi-prong selection process vs. no process at all (guessing), should improve your winning percentage.
At Karp Financial Strategies we design our custom portfolios through a multi-faceted approach, combining quantitative analysis with qualitative research.
Jeffrey R. Karp
Read our KFS Weekly Market Commentary for the week of March 17, 2014 to see how the theme of the NCAA tournament/bracketology can be applied to specific economic conditions.