How to Do Well in March Madness—and Investing

Every year at this time, the NCAA basketball tournament thrills fans and creates so much interest that an estimated one in four Americans fills out a bracket to try to predict who will win it all. I really enjoy watching the games and always fill out a bracket in a pool with my family. Whenever I’m thinking about my picks, I can’t help but see connections between investing and March Madness.

Let’s start with the similarities:

Picking winners is hard.

• Maybe your NCAA championship bracket picks are as wrong as mine, but don’t feel bad. The odds of correctly predicting the winner of all 67 tournament games are astronomically high.
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• In the stock market, most professional investors don’t beat the market in a typical year.

An informed approach improves your odds.

• If you want to do well with your bracket this year, what should you do? The tournament selection committee seeds teams from 1 to 16 in four regions. That’s useful information. Always pick the higher-rated team (the lower seed), and you’ll have a good chance of winning more games than most. It doesn’t mean you’re going to be the champion of your pool, but year after year, you’ll tilt the odds in your favor.
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• With investing, rather than trying to guess winners, you can take an informed approach that relies on decades of academic research, and choose to buy the market. Over the past 100 years, US stocks have returned, on average, about 10% a year. While past performance doesn't guarantee future results, having a plan can help you have a better investment experience.

Your results compound over time.

• In most March Madness brackets, you earn points for the individual outcomes you predict successfully. In the first round of the tournament, each game is worth 1 point. In Round 2, that doubles to 2 points. Then 4, then 8, then 16, and finally 32. If you guess a perfect Round 1, you earn 32 points—the same number you get for picking the winner of the championship game. What’s important is staying alive, surviving another round to be able to make a run at the title. If you decide to pick against a favored team and they win, you’ve lost that team for the rest of March Madness. It generally improves your odds to reduce your risk, take the long view, and focus on getting the ultimate winner right rather than gambling on an early-round upset.
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• Compounding is a key principle of successful investing as well. Your decisions today can have a huge impact on how your investments grow. Take the US stock market’s historical 10% return before fees and taxes. That’s doubling your money about every seven years. Remember how bracket points double for each round? Well, $1,000 US dollars invested today could be worth more than $28,000 in 35 years. That’s the power of compounding. By staying invested and focusing on the long term, you can make more sensible decisions about how to pursue your investment goals. And you can relax and tune out the noise, knowing you’ve developed a plan you can stick with.

Good luck and good strategy are not the same.

• Every year, some money manager is going to have the best returns. Every year in each bracket pool, someone wins. But in both cases, it’s unlikely that they will continue to come out on top year after year. My family’s annual bracket challenge is evidence that it’s nearly impossible to win consistently. This year’s winner may well be in elementary school.
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• When people say, “Look at all the money I made on this stock,” I feel it’s the same as when someone says, “I picked Fairleigh Dickinson!” That was the most recent No. 16 seed to topple a No. 1, and only the second team to ever do so. Good for you—you got lucky.

How about the differences:

The thrill of participating in a March Madness pool with a lot of people comes from the possibility of winning the pool.

• My family fills out a bracket each year, and we engrave the name of the winner on a little trophy. And to most people, it’s only the winner who matters. I don’t even remember who in our family came in second last year.
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• Investing is different. You should have the goal of doing a little bit better than average, which can add up to a lot over time. Taking unnecessary risks can lead to big losses. As investors, we must remain focused on trying to capture that long-term compounded return of the market, also known as the expected return. That means taking a cautious approach and avoiding the temptation of trying to pick unexpected winners or underdogs.

There’s always next year.

• With the NCAA, there’s a new bracket to fill out every year. You get a fresh start.
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• With investing, your results are cumulative. That’s why it’s so important to develop a good plan you can stick with.

While there are certainly similarities between March Madness and investing, it’s crucial to recognize the key differences. When you’re picking brackets, it’s supposed to be fun, which is why some people choose to take some risks on underdogs. (I always have my Kansas Jayhawks going deep into the tournament no matter what the selection committee thinks.) With investing, however, it’s better to take a measured and disciplined approach with the goal of pursuing higher expected returns while reducing risk. So enjoy March Madness, but don’t confuse the risks of filling out a bracket with the benefits of investing in markets.

Stay calm and stay invested.

David