[dropcap]S[/dropcap]ometimes learning the most valuable lessons require getting burned a few times. And nowhere do you get burned as often as in the world of sports betting, whether it’s in office pools, or at casinos. It would seem natural, then, that through years of trial and error, an experienced sports bettor could formulate a foolproof strategy for picking winners and losers.
Sadly, that’s not quite the case – even the Vegas oddsmakers get burned on a weekly basis. But that doesn’t mean there aren’t any lessons to be learned, buried somewhere in the ashes of all those near-misses. As a longtime financial advisor who’s also lost a few times in weekly football pools, I naturally lean on lessons I’ve learned from the markets over the years. Here are three core investing insights worth applying to your pools this week and next as the big bowl games (and next, NFL playoffs) get underway.
It’s important to pick value and growth
I’ve played in a college fantasy football league for the past three years. Each week, the league commissioner picks 25 games, and the 25 participants in the pool pick winners against the point spread. Whoever picks the most winners takes home the biggest pot of money (theoretically, of course, as I would never gamble).
Bringing some of my investment background with me, I tried to apply the Fama-French 3 Factor model to my picks. The Fama-French 3 Factor model shows compelling evidence that beaten-up stocks actually tend to outperform the Wall Street darling stocks. The beaten-up stocks are known as “value stocks,” while the darlings are known as “growth stocks.” The theory suggests it’s easier for value stocks to outperform growth stocks because their expectations are so much lower. The term “reversion to the mean” explains that the bad stocks aren’t as bad as people think, and the good stocks aren’t as good, either.
So, the first year I played, I bet on every underdog. The oddsmakers gave some of these teams 40- or 50-point spreads, meaning that even if my team lost by 38 points, I would still be a winner. My theory was that the bad teams weren’t as bad as the oddsmakers thought, nor were the good teams all that stellar. I called this value betting.
I used the value-betting strategy the entire year — and finished dead last. It turned out my brilliant strategy wasn’t so brilliant after all. Had I invested my portfolio this way, I’d have been pretty poor by year’s end. And as I write this column, value is underperforming growth in the U.S. stock market by over three percentage points. Putting all your eggs in one investment-style basket is foolish, whether it’s football strategy or investing. My portfolio owns both value and growth and my fantasy football picks are now diversified into underdogs and favorites.
Don’t confuse luck with skill
This year, my new strategy was to pick teams based simply on my gut instinct. And it worked, at least for a while. By midway through the season, I was so far ahead of the pack that the other players were e-mailing me to ask how I got my inside knowledge. Amazingly, I won the pool two weeks in a row, a feat with only a 0.2 percent chance of happening. Had I been a mutual fund manager, I’d have been on CNBC with Cramer touting my brilliance.
I felt like Bill Miller of Legg Mason, whose Value Trust fund (LMVTX) bested the S&P 500 for 15 straight years. But, unfortunately, my luck — just like Miller’s — eventually ran out, and I crashed and burned in the second half of the year. (Miller’s mutual fund finally plunged from a Morningstar five-star rating to a one-star.) But whereas Miller is now stepping down as an investment manager, I fully intend to come back for more next year. At least I finished the year in second place.
Don’t invest with your heart
It’s not easy being a fan of my alma maters. In 1981, while I was attending Northwestern, the football team set an NCAA record for the most consecutive losses. And then there’s my undergrad school, the University of Colorado, which, going into this season, hadn’t won a road game in three years.
So at the beginning of the season — Colorado’s first in the Pac-12 — a friend bet me that my Buffs would come in last place in their division. My friend is smart, but I just had a gut feeling that Colorado would surprise people this year. I just knew we were finally going to have a winning season. Naturally, we didn’t.
This season ended up being just as painful as any other year, with Colorado ending with a 3-9 record. But thanks to a generous tie-breaker technicality, Colorado wasn’t officially in last place, and I actually won my bet.
It’s certainly nice to win, but in retrospect, it was an emotional bet, and emotions cause us to do the wrong things when it comes to investing. It’s OK, and even fun, to act foolishly if we’re talking about a college football fantasy league. It’s not OK to act foolishly with your portfolio.
How will I do in next year’s fantasy football league? Let’s just say that if I were an active fund manager, I wouldn’t put much of my money in my own management.
Image used under Creative Commons by Flickr user jblackburn.