Don’t Get Blindsided – Super Bowl Version LIII

Tips Direct from the NFL

The past few years, I’ve written Super Bowl posts about the emotions of big financial market games often getting the best of investors (click here for last year’s version).

This year, I was fortunate enough to collaborate with Jeff Locke, who has been a punter in the NFL since 2013 (he deserves full credit for this post).

Jeff shared a bunch of stories with me about his time in the NFL and I shared some (admittedly less cool) tales about my time in and around Wall Street.  Surprisingly, although my stories involved IPO backers not linebackers and quarter-end returns not quarterbacks, several common themes emerged.

Both environments – the NFL and Wall Street – encourage emotionally charged, seemingly chaotic, fast paced action. And in both environments, participants tend to perform much better when they do the following:

  • Become good students of what consistently works and what doesn’t
  • Develop plans based on what they are trying to achieve, not the models or game plans of others
  • Evaluate the resources available and those that can consistently be leveraged
  • Keep calm and stay anchored on strategies that have high probabilities of success related to the long-term goal

Keying on the last bullet first, it’s quite hard to stay stoically focused on the often-simple, commonly boring basics. The fancy play or exclusive investment deal sounds great.  Of course, deep down we all know that executing them with consistency is almost impossible, but it’s easy to get caught up in the excitement. 

As Jeff says:

“Constant change is the only consistent part of the NFL. New training methods, supplements, techniques, schemes, and plays are developed every year. They all sound great but can get you off your long-term plan and they often don’t beat staying focused on the boring but consistently proven basics.”

We’re not suggesting, either in football or in investing, that you shouldn’t keep your eyes and ears open for good ideas.  You should – and should consider good ideas carefully.  But be a good fiduciary of your own team or portfolio and a good student of what has a high probability of consistent success relative to other options.

As Jeff also wisely says:

“Big plays are fun and make Top 10 highlight shows, but it’s the consistent execution of the simple fundamentals and techniques, and the avoidance of turnovers and penalties, that win games.”

We know that this isn’t exciting, though – we watch the highlight reels as often as everybody else. So to help drive the point home, Jeff and I looked at the stats.

This is what we found.

What are the odds of a football player consistently outperforming his peers and making it into the NFL?

The chance of a high school football athlete playing any level of NCAA football is approximately 7%.

The chance of an NCAA football player then making it into the NFL is about 4%.

In other words, on average, a high school player’s chance of making an NFL team is much less than 1%.

Of course, dreams are realized, and hard work does sometimes pay off. NFL players are living proof of this.  But the smart young player keeps a cool and rational eye on the odds.

The same is true with investing.

As I’ve written before in pieces such as Say It Ain’t So, we all want to believe in outliers. It’s not easy to stay anchored on simple solutions. 

Our defenses are constantly rushed by market prognostications and highlight reels – in this case, quarterly commentary in leading financial publications highlighting the most recent top performing investment strategies.

What do the investment stats say, though, about this constant play-by-play?

A good place to start might be Wall Street’s ability to pick winning or losing markets.  As Jeff and I unfortunately were able to joke about, the Street continues to post big fat goose eggs.

Consider last year.  Again, consensus market prognostications were wrong.

Wall Street’s median forecasted 2018 calendar year return was 10.3% (click here for more), continuing its unbroken streak of never accurately calling a market downturn (click here for the full report).

What about all the active investment strategies that are running around the investment field?

Well-respected research teams continue to report the following:

“An inverse relationship generally exists between the measurement time horizon and the ability of top-performing funds to maintain their status. It is worth noting that only 0.91% of large cap and no mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period.” 

In other words, the odds of a fund’s performance remaining in the top quartile over five years are as low as a high school football player’s chance of making the NFL.

As I wrote in a recent post about how active managers have also tended to underperform in losing markets, (see Outperformance 100% of the Time?), even though many in our industry remain confident that they can consistently pick pros, we seem to have an overconfidence problem.

“We find no evidence that [active management] recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless.” was the finding of a study published by the Journal of Finance.

Strong words for sure, but again Jeff’s experiences in the NFL match up.  As he said to me, “NFL players and others who have good sized investment portfolios tend to underestimate how rare of an outlier they are.  This creates a consistently exploited weakness for outlier investment ideas.”

“The often-complex, big play pitches sound great, but many guys overestimate the probability of success. The deeply-rooted belief in skill that is necessary for players and business professionals to perform at the highest level tends to be the exact thing that gets them into trouble when they’re investing.”

From what I’ve seen and heard, players and non-players alike at any asset level would be much better off if they kept it simple and followed the advice of a guy like Warren Buffett.

What’s this investment all-star’s consistent message?

“Everybody’s got an idea… [but] usually simplest is the best.”

Jeff and I couldn’t agree more.

Before rushing onto the investing field, take a time-out.  Nothing is wrong with trying to pull off a big play every once in a while, but it’s good to limit your exposure to low probability bets.

To avoid getting sacked, stick to your long-term game plan and consider the following advice that Buffett gave to a Hall of Fame destined sports superstar, LeBron James:

“Just make monthly investments in a low-cost index fund.”

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For more on what the evidence suggests as to how to be a prudent fiduciary of your wealth plan, click the following:

How Can Trustees Be Prudently Passive?


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