The most dramatic game of the 2018 NCAA Men’s Basketball tournament thus far was the victory of 16th seeded University of Maryland Baltimore County (UMBC) over the (overall) number one seeded University of Virginia (UVA). For those not familiar, the NCAA tournament is a 64-team tournament, split into 4 regions. Within each region, teams are initially seeded or ranked from 1 to 16 – the higher the seeding, the better the team.
Based on probability, UMBC was not supposed to win the game and UVA was not supposed to lose the game. There have been 135 previous matchups between #1 and #16 seeds over the last 30+ years and the #16 seed has never won. Ever. Because of this fact, 99.4% of all NCAA brackets had picked UVA to win the game. But that’s not what happened. It was the thrill of victory for Baltimore and the agony of defeat for Charlottesville.
I don’t follow college basketball as much as I used to. I’m a casual fan but this game got me thinking about statistics, and biases, and investment philosophy. The game was a fantastic spectacle full of investment lessons for us all, starting with…
#1 The rare circumstance can happen, but it’s rare for a reason.
The first lesson is that we don’t want to take on unnecessary risk by chasing stocks that we heard someone talk about on the radio or TV. We ought not try to build wealth by hitting “home-runs.” Could we possibly identify the next Amazon, Facebook, Google, or Apple before their share prices exploded? Maybe, but the odds are certainly not in our favor. It may seem obvious in retrospect later, but it wasn’t obvious beforehand. Better to stick with the steady and prudent approach to accumulating wealth that has stood the test of time.
I saw an online image of a ticket from a sports book that shows an $800 bet on UMBC that resulted in a payout of $16,800. It’s so enticing – all I had to do was bet $800 and I would have made back 20 times that amount. Well you would have, on this bet. If you had bet the same $800 on all the previous #1 vs. #16 seed games, you would have lost $108,000. Suddenly the $16,800 payoff doesn’t seem that great.
But what if you were a student or a graduate or a former player for UMBC? Surely you have an inside track or some special knowledge. Well, you think that because you’re suffering from…
#2 Hometown and other biases
I spent 7 years living in Charlottesville, and I know a fair amount of people connected with UVA. Did that color my thoughts on them possibly winning this particular basketball game? I can’t say for certain, but it likely did. I probably thought consciously or sub-consciously that they would win because they were the better team, they were supposed to win and plus, I lived a few miles from the university. And it’s an excellent university – but I’m biased.
As mentioned earlier, only 0.6% of all brackets picked UMBC to beat UVA. My guess is that most of those 0.6% live within a 10-mile radius of the UMBC campus or had some affiliation with the university. I don’t think they had any special knowledge, I think they were just being fans.
We often become fans of our investments. We might own a lot of our employer’s stock because we earn our paycheck there, we understand how things work (at least we think we do), and we’re “fans” of the company. We might own a disproportionate amount of stock in a company because we like their snazzy products or their hip services. And we incorrectly think that this company whose stock we own will always be good, which leads us to our next investment lesson…
#3 Great stocks or great companies don’t always remain so.
UVA was not supposed to lose this game. They were the #1 seed. They were favored by 20+ points. They were a lock. But they lost the game. And just like the favorites can lose, great companies can fall and struggle and be in the news for all the wrong reasons. Technology is changing at breakneck speed, there’s constant innovation in so many different fields of industry, and there’s an awful lot about companies that we don’t know and can’t predict – even if we work there or even if we love their products.
The UMBC-UVA basketball game was one for the ages. If the statistics hold, there won’t be a win by a #16 seed for another 30 years. While we patiently wait for the next “greatest upset of all time”, we can manage our investments in such a way that we don’t have to swing for the fences or let our biases get the best of us. Ideally, we want our investments to own all the teams in the tournament because what we expect to happen might not actually happen.