Basketball tournaments are a major delight for sports fans, often creating a frenzy in which both teams and fans alike become caught up. Filling out a bracket is perhaps the only thing more popular than actually watching the tournament games. Like investing, bracket picks are a matter of balancing expertise, expectation, risk, and reward.
- It is about getting the most right, not being perfect.
Investing, like a bracket, is not going to be perfect. The mathematical odds of correctly picking the outcome of every game in a 68-team tournament are 1 in 9,223,372,036,854,775,808 (in other words: nine quintillion). Statistically, each person on earth would have to fill out more than a billion brackets, all of which unique from every other bracket, before one would be perfect.
The odds of all your investments continually producing above-market returns could be just as unlikely. Successful investing is not about being perfect — it is about making as many wise decisions as possible and getting more investments right than wrong.
- Do not forget to diversify.
No one turns in a bracket with results for just one or two teams and expects to earn enough points to win. People fill out the entire bracket to gather enough points and ensure that wins in one region can mitigate losses in another.
Diversification is also incredibly important to investors. No matter how confident you are in an investment, it is usually not a good idea to put all your money in one place.
- Anything could happen, but that does not mean it will.
Although there are always some upsets, favored teams usually do reasonably well. Generally investors should not assume that diversifying among long-shot stocks is a recipe for success. You could successfully score on every upset game of the tournament if you only picked underdogs, but there is almost no way those few successful games could counteract every matchup where things went as everyone expected.
- Last year’s tournament was last year.
Past performance guarantees nothing about the future. Investors (and basketball fans) should never assume that their best picks from last year will have a repeat performance. A team generally wins because of skill and management; a hot stock should only be kept if there are sound reasons for its past (and future) success.
- Lucky systems are a myth.
Humans are hardwired to see patterns. It is a survival instinct that helps us find the things that we need and avoid dangerous situations. Superstitions form when people notice a pattern and choose to only remember the times when it worked. A foolish investment (or bracket) is one that relies on superstitious or “hunch” decision-making. Investments are ownership in a company, not a gamble. Successful companies are the key to successful stocks.
- The drama increases the closer you watch.
Though watching the action of a live game is an exciting part of being a sports fan, it is usually a poor idea when investing. Drama is good entertainment, but it almost never helps an investor. Watching every twitch of the market only leads to bad decision-making. A wise investor stays as detached as possible from daily stock fluctuations.
How they are different: Investing is not a competition
It is important to remember that good investing is not about being the best investor in the world; it is about securing enough money for your future. Unlike your bracket, you should not worry about “beating” others’ investment strategies. A sound strategy might not be as impressive as someone else’s high-risk approach, but it can still be successful.