Are you ready for the big game? The poised Boston champion Pats vs. City of Brotherly Love, Rocky-like underdog Eagles.
Beyond the entertainment of the Super Bowl, the NFL runs a business that generates exceptional returns. If marketing is your game, you could do a lot worse than to follow the lead of the NFL.
However, as I wrote in my original Don’t Get Sacked piece back in 2016, investors can learn a lot from some NFL stars.
How not to invest.
Star players run up impressive records on the field, but many stories exist of even combined Heisman Trophy, College National Champion and Super Bowl stars like Tony Dorsett failing in finance (Brady or Foles, read here and don’t let this be you).
Some might think spending is the problem, and in some cases you would be correct. More often than not, however, professional athletes make the same mistakes as many other investors.
A good article on this was published in Forbes titled, How To Lose $20 million. In the piece, a top sports agent was quoted as saying:
“What really gets these guys are not the cars, jewelry, or even houses, it is the big three – divorce, poor tax planning, and bad investments.”
I won’t make any comments on family issues, and I am not an accountant, but I will make a few quick comments on investing.
Every year I update my Groundhog Day post, which talks about how investors fall, over and over again, for daily Wall Street prognostications that are never in doubt but often wrong. Our natural tendency to put great faith in well-spoken professionals is called the halo effect, which is a documented psychological bias that we have to place confidence in people who are better known, and deemed to be more intelligent, better looking, or more respected.
What marketing machine knows this well?
Evidence consistenly shows that low-cost, boring, simple investments such as index funds often outperform more complex strategies (click the following see data on How to Perform Better). Our defenses, however, are constantly rushed by CNBC spots presented by professionals with halos. In the morning someone might say “buy”, but in the afternoon someone might say “sell”.
It is no wonder studies show that the average investor significantly underperforms the market due to emotional selling or buying at the wrong time.
According to research from Morningstar published back in 2013, the 10-year return of the average balanced fund (mix of stocks and bonds) was almost 7%.
What was the average return of investors in balanced funds over this same time period?
Approximately 5%, which represents a gap of 2% on average per year for 10 years.
The gap for investors in sector funds, which tend to attract more active traders, was even higher at over 3% on average per year for 10 years (click here for the full report and see the below chart).
Just as exciting calls on the field drive sales of TV ads and profits for the NFL, transactions and new products quarterbacked by haloed investment managers drive Wall Street profits.
I don’t make market forecasts (click here for why), but I do consistently go on the record with the following:
Whenever you see the market have a difficult time, you will see
- Sensational headlines that are designed to sell ads, but not conducive to good investing
- Wall Street, which loves volatility, not missing out on the opportunity to sell a trade or a product when anxiety is high
- Sales pitches for expensive downside protection products and hedging strategies
As I wrote about in What Should Investors Do Now, if an investment coach is constantly recommending new schemes, especially during volatile times, “Just Say No”.
Next, as your own best general manager, consider firing the coach.
To help you defend again aggressive offensive moves, consider the following quote:
“Preston, what you need to understand is that I get paid to publish ideas that we can sell for a profit. If I don’t, the transactional brokers and management complain. I then lose my job. I learned a long time ago that it pays to feed the Street.”
I heard this one night over dinner from the Global Chief Investment Officer of a large international wealth management firm. I got to know this person well over the years and, even though it was his job to help pitch active investment strategies, ironically he often said his belief in investing skill was very low. What did he quietly admit was often the best choice for investors?
Crazy you might say. Top investors don’t invest passively. They are active stars who have access to the best talent and top MBA draft picks. With their years of training and resources, surely they believe they can consistently post record stats.
Well, it has been my experience that many in the industry, especially off the record after an adult beverage, consistently say the following:
What have a few investing superstars said on the record?
First, consider David Swenson, Chief Investment Officer of Yale’s Endowment.
Yale might not produce as many NFL stars as my favorite SEC schools, but they have some of the top endowment returns in the nation, and Yale consistently leads the league.
What does Swenson say in his book on personal investing?
“A serious fiduciary with responsibility for taxable assets recognizes that only extraordinary circumstances justify deviation from a simple strategy…”
You can read more on this in a piece that I wrote titled What Would Yale Do If It Was Taxable (yes, as Swenson and the NFL agent mention, don’t forget to factor in taxes).
Second, how about Warren Buffett?
Recently, he gave the following advice on CNBC to the NBA star, LeBron James.
“Everybody’s got an idea… [but] usually simplest is the best”
Buffett went on to say that athletes are often approached with investment ideas but that LeBron should “just make monthly investments in a low-cost index fund” (click here to read the full story). As an FYI, he also wrote in a 2013 Berkshire annual letter to shareholders that the trustee of his estate should do the following for the benefit of his heirs:
“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals…”
So, before rushing onto the investing field, consider taking a time-out.
Don’t get by getting caught up in Super Bowl type investing hype, and don’t make investing a competition.
Is winning really defined by outperforming the other guy or is it about reaching goals on behalf of your family?
To avoid getting sacked by Wall Street’s marketing blitzes, stick to your long-term game plan and consider following the advice of investing superstars such as Buffet and Swenson.
As they have said, the evidence is clear on how to consistenly produce goal winning investment scores.
Keep it simple and consider more index funds.
Preston McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor committed to forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts, and follow him on social media, please visit the following: