What March Madness Has In Common With Choosing Investments

It’s finally here – the least productive week on the employment calendar: the start of March Madness. 2011 estimates suggest American workers lost 8.4 million hours of productivity– costing their employers nearly $200 million dollars – leading up to the start of the annual NCAA men’s basketball tournament.

As I started filling out my brackets this year, I started thinking about just how similar choosing the four teams I think will make it to the Final Four is to choosing investments that will make you a winner.

Avoid The Trendy Pick

When the University of Cincinnati knocked off Syracuse in the Big East Tournament, the Bearcats suddenly became a trendy pick to make it into the second weekend of the NCAA tournament. They had the size; they had the speed; they had the swagger. But before you pencil in the other team from the Buckeye State to make it to the Sweet Sixteen, consider their resume:

* 24-10 season record

* Finished 5th in the Big East regular season

* Ranked 42 in RPI

Sure, the Bearcats are a trendy pick to advance far into the tournament – after all, they beat one of the top two teams in the country on a neutral floor. Their resume, however, shows their weaknesses: this team couldn’t even crack the top four in their own conference’s regular season standings. Could they really be one of the top 16 teams in the entire country?

When it comes to stock picks, you’ve got to avoid the trendy choices too. Maybe the company had a great fourth quarter, making it look like a tantalizing option. But how did they fare in the first nine months of the year? Just because the stock suddenly started to surge doesn’t mean the company has the management, infrastructure, or marketing to sustain that momentum.

Look For Stability At The Top

What do Duke, Syracuse, and Michigan State have in common? Three coaches who have made long-term commitments to their institutions (that’s Mike Krzyzewski, Jim Boeheim, and Tom Izzo for the basketball-illiterate among us). The result? These three teams nabbed three of the top eight seeds in this year’s field, making any of them solid choices when filling out your bracket.

It’s crucial to look for proven leaders with a strong track record when selecting stock. Especially in today’s economy, when company chairmen are hiring and firing CEOs and presidents at will in hopes of boosting their Wall Street standing, a leader with longevity – who has shown his commitment to the company by staying through the ups and downs, while introducing innovative new products and practices to keep the company at the top of its game, is vital for your portfolio.

Beware The One-And-Dones

Two of the past three years, the Kentucky Wildcats out of the SEC (and by SEC, I mean Southeastern Conference, not the Securities & Exchange Commission) have secured a number one seed in the NCAA men’s basketball tournament. However, the Wildcats failed to reach the Final Four as a top seed in 2010 – and I think they’ll fall short once again this season.

Why? I point to John Calipari, the Kentucky coach. He’s a tremendous coach, having previously succeeded at both Memphis and UMass, but he’s an even better recruiter. And that’s the problem.

Each year, Calipari brings in a star-studded class of what NCAA basketball analyst Dick Vitale would call “diaper dandies.” These players stride on to campus in the fall, rock the college basketball universe, but – at least in Kentucky’s case – depart for the greener (think money) pastures of the NBA after a single season.

Just as you want to look for a company with longevity at the top, you want to beware of companies with executives who jump around, never staying in the same place for more than a year or two. Just like Kentucky’s star freshman Anthony Davis, they probably have an outstanding resume – after all, they made it to the top of their trade. But just how much can you learn about a company – its product, its culture – in a few years, let alone a single year?

Look For Teams That Make Their Free Throws

In basketball, and in business, it’s important to do the simple things well. That’s why if a team struggles to make its free throws – like UNLV who, despite knocking off UNC early in the season, makes just two-thirds of its free throw attempts – I have a hard time advancing them in my tournament bracket.

Same goes for choosing investments – and, just as importantly, an investment advisor. When I’m interviewing potential financial advisers, I’m looking for someone who does well at the easy things: solid, prolonged gains; diversified holdings; someone who holds all the right certifications and licenses.

Picture this scenario: it’s the end of the game, and the team you’ve chosen to move on to the next round of the tournament is down by one and going to the line for a crucial one-and-one. Would you rather have a player from Ohio State (with a team free throw average of 69%) or Missouri (with a team average of 76%) taking those foul shots? If they can’t accomplish even the most basic facets of the game, they have no part in my bracket – or my financial future.

Pick Teams That Pay You Dividends

At the end of the tournament, just one team will be able to hoist the championship trophy. But over the course of the year, your team may pay you any number of “dividends” for the investment of your time and passion. Maybe your team won its regular season conference title, or maybe it won its conference tournament. Maybe your team beat your biggest rival. Whatever the case, even though you didn’t win the grand-daddy of them all, you still got enough return on your investment to make you feel like a winner.

That’s why I like to pick stocks that pay dividends. The money I make off a dividend payment may not be enough on which to retire, but it’s a building block for bigger things. Like a team that wins its regular season conference title, but fails to advance past the round of 32, it gives the team motivation to do even more the next season.

Readers, which teams are you planning on taking all the way to the “bank” this March?

3 Responses to What March Madness Has In Common With Choosing Investments

  1. Mizzou is going all the way. They won the Big 12 tourney, have a 30-4 record, are ranked #3 in the coaches poll, and yet the committee says they are the 8th best team in the country. They are going to use that disrespect to make it all the way to New Orleans.

  2. Also, don’t think that past performance will have anything to do with future payout. Remember, only one person in all of ESPN last year predicted the right final four.

  3. @frugalportland, you make a GREAT point about past performance – after all, look at Butler: back to back championship games, and they didn’t even make the field of 68 this year… same goes for investments! Under the wrong kind of direction, even a stock that performed strong for years can take a turn for the worse.