The NCAA Tournament and Investing

Bill Parrott |

It's finally here! The greatest sporting event is back after last year's hiatus. Though fans, bands, cheerleaders, and mascots are missing, it's still exciting to watch. My family and I look forward to competing against each other with our brackets, and I always participate in ESPN's Tournament Challenge, hoping that I will be the one with the perfect bracket. However, after Oral Roberts beat Ohio State, I'm out, and so are 95% of the other participants. Picking winners is not easy. The odds of a perfect bracket is 1 in 9,223,372,036,854,775,808. If you know something about basketball, your odds improve to 1 in 120 million.[1]

According to ESPN, there are 108 perfect brackets out of 14.7 million submitted or .000735% after the opening games. And 93 participants lost every game! Is this an ideal bell curve? I rank 8.9 million after selecting nine winners, so I still have a chance. My choice to win it all is Baylor because they're a good team, and it's my daughter's alma mater. I'm also rooting for Gonzaga because of their affiliation with the West Coast Conference and Arkansas since their head coach is a graduate of the University of San Diego.

The only thing harder than picking a perfect bracket is selecting a basket of individual stocks that outperform the market every year.  Yes, it's possible to beat the market in the short-term. I'm sure several individuals bought Peleton, Zoom, DocuSign, or NIO last year and made a lot of money riding the COVID wave. However, have they been profitable for five, ten, or thirty years? Also, the more stocks you own, the closer your portfolio will resemble an index fund. What is the magic number of stocks to hold? In one study, it's twenty.[2] How are the four companies faring this year? They're down 12.5%, underperforming the S&P 500.

Standard & Poors SPIVA study revealed that 82% of large-cap fund managers did not outperform the S&P 500 over ten years, and 87% failed to do so after fifteen years. The same data holds for small and mid-cap money managers. The study found that 74% of mid-cap managers did not beat the S&P 400, while 75% of small-cap managers failed to match the S&P 600.[3] I know what you're thinking; I'll only invest in the winners. Some professional money managers outperform the market over time, but can you identify them before they start their run?

Peter Lynch, the legendary fund manager of the Fidelity Magellan mutual fund, was thirty-three when he took over managing the fund. The fund only had $18 million in assets in 1977. The fund’s assets would swell to $14 billion when he retired. Before taking over as the lead money manager, the fund lost 42% in 1973 and 28% in 1974. If you invested $10,000 in the fund, you lost 70% of your capital. Would you have remained invested in the fund as Mr. Lynch took the helm? If you sold out to find a better money manager, you missed incredible returns. Mr. Lynch posted eye-popping returns from 1977 to 1990 as the fund generated an average annual return of 29.2%, more than double the S&P 500. In hindsight, Mr. Lynch was an obvious choice. His fund returned 2,570%. A $10,000 investment grew to $267,420![4]

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I bet the person who currently has a perfect bracket is posting about it on social media letting the world know they picked Oral Roberts and North Texas. The same is probably true for people who chose a few winning stocks last year. I will let them enjoy their fifteen minutes of fame. If they can do it every year, then I will give them the credit they deserve.

In the meantime, I would recommend investing your money in a globally diversified portfolio of low-cost mutual funds. If you want to take a flier on a stock or two, then allocate 1% to 3% of your investment capital to your ideas.

Invest for the long-term, buy the dips, save your money, follow your plan, and good things will happen.

It's the little details that are vital. Little things make big things happen. ~ John Wooden


March 20, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.