4 Ways March Madness Is Like Investing

March Madness is bar none my favorite sporting event of the year.  Even if college basketball isn’t your favorite sport, you have to love the intensity and unpredictability of the tournament.  In fact, March Madness is a lot like investing.  In typical blogger fashion, I’ve come up with a list of ways a popular social event relates to personal finance, no matter how tenuous the connection, and connected the dots to reveal timeless everyday truths about finance and investing.  How convenient for you!

4 Ways March Madness Is Like Investing

1. Anything can happen – Just like in the market, absolutely anything can and does happen in the NCAA tournament.  Upsets are the rule rather than the exception and the only thing you can expect is that the unexpected will happen.  North Carolina was on top of everybody’s list to make the final but Michigan State?  I doubt anybody but hardcore fans even considered the possibility.
2. Results Are Volatile – The single-elimination format adds a lot of uncertainty to the mix.  Were each round of the play-off a best-of-seven series, it’s likely the best teams would almost always rise to the top over time.  But in a single-elimination tournament, any team can beat any other team on any given night, if only out of luck.  Stocks are the same way:  over the long run, quality wins out.  But on any given day, a risky penny-stock with no profits to speak of could out-perform the steadiest of blue-chips.
3. The top teams don’t always live up to their expectations - Sometimes (such as last year), most if not all of the #1 seeds (teams expected to win their bracket) make it to the Final Four.  Most years, however, no more than one or two #1 seeds make it this far.  This year, for instance, only North Carolina and UConn share that honor.  The result is that the final game’s participants and outcome are often a complete surprise.  Similarly, the most popular, high-growth stocks often crash-and-burn while the boring steady-growers prosper.
4. In the end, quality prevails – While it’s true that anything can happen and a #1 seed doesn’t always walk away the champion, the highly-ranked teams still tend to dominate the lower-ranked teams.  Never has a #16 seed beat a #1 seed in the NCAA tournament (although it was a close call this year!) and rarely does a seed above #3 or #4 make it to the Final Four, much less to the championship.  While not a perfect predictor, the wisdom of crowds tends to be correct more often than not.  Were it allowed, you would probably do well over the long term betting on the #1 and #2 seeds over the rest of the field, since this group of highly-ranked teams will win the vast majority of the time.  Similarly, a portfolio of high-quality stocks bought at reasonable prices is a safe bet to out-perform today’s hot sector over the long haul.