What a great ending to a phenomenal football season for the NFL! It seems so rare that a Super Bowl game goes down to the wire, and this was the third consecutive year that it could have gone either way. As is often the case, I find life lessons in sporting events, typically ones that apply to investing, and this year's Super Bowl offered no shortage.
As I mentioned last month, I am going to be sharing years of wisdom on a more frequent basis in what I am calling the KISS (Keep it short and simple) series. Not only do these articles have relatively few words, but they also lack charts and graphs, fancy math and even primary or secondary tickers. In case you missed the previous three, here they are in chronological order:
- Why PEG Ratio Analysis is Flawed
- 5 Tips for Becoming a Better Stock Picker
- 4 Ways to Become a Better Self-Directed Investor
So, with no further delay, here are the six big takeaways that I had from Super Bowl XLVII and the entire football season.
Beyoncé Bounces Back
Like public opinion, investor sentiment swings wildly. After being caught "lip-syncing" at the Presidential Inauguration, Beyoncé put on such a show that probably no one will ever even remember the controversy. Not only that, she handled it well, admitting the truth and explaining her actions.
When it comes to investing, good companies stumble, and this can be an opportunity for investors to pick up a fumble and score. Pay attention at these times to how the CEO and other executives handle these problems. They can learn a lot from Beyoncé!
Expect the Unexpected
When it comes to football, all sorts of things can happen, like an injury, inclement weather or even a power surge that leaves the lights out for 1/2 hour. This is why as an investor you don't put all your eggs in one basket, no matter how confident you may be. Football teams have reserve players who can step up if needed. If you have all your investments in a company that does the unexpected, what will you do? It's important to remember that stocks usually move much more than we expect and often in the opposite direction. If you aren't prepared, you may make a terrible mistake.
Know "What's Priced In"
After week 13, the Houston Texans were 5-1 odds to win the Super Bowl. As a fan, of course part of me thought those odds were stupidly high, but as a rational person, I calculated that they were ridiculously low (a really bad bet, even if they were going to win). Anyone that bets on football games knows about "the line", a system to equalize the gamblers and clear the market by assessing points against the favored team. I assume everyone knows what I am talking about, but for those who don't, it's possible that you can win a football bet even if the team you bet on loses as long as it is by fewer points than they receive if they are the underdog (not favored).
The point I am trying to make is that you can hear a really great story and invest, but it is essential to understand what is priced in. Think back to Cisco (CSCO), for example. Many people incorrectly assume that its business isn't as good today, with the stock near 21, as it was in 2000, when the stock was 82 at the peak. In FY12, CSCO earned 1.49 on a GAAP basis, with sales at $46 billion. In FY00, CSCO earned 0.36 on sales of $19 billion. This is a pretty easy example, but it withstands the test of time. Often investors overpay (or underpay) and substantially. It's not enough to just like a story - one has to understand how other investors are considering it as well and the basic math of the "bet" one is making.
Sometimes Young and Unproven is the Best Bet
San Francisco started the year with Alex Smith, but it was Colin Kaepernick, a second-year player, who took them to the Super Bowl. Let's not forget all the incredible excitement from rookies Robert Griffin III, Andrew Luck and Russell Wilson. If you want some performance from your portfolio, perhaps you should devote at least some of it to Small-Caps. While the last few years have been a challenge for smaller companies relative to larger ones, there is something to be said for having "rookies" and seasoned veterans as part of a diversified portfolio.
Don't Be Afraid to Trade
I already cited what seems now like a shrewd move by SF's Coach Jim Harbaugh to bench his starting quarterback, and this is a great example of portfolio management in my view. The point I want to make though is that sentiment shifts. The Arizona Cardinals started the year with four consecutive wins. By the end of the year, they lost what I think was the most one-sided game ever to Seattle (58-0) and ended the year losing 11 of their final 12 games.
Similarly, the Ravens limped into the playoffs, and very few people thought that they had a chance. I had a momentum-based style myself, favoring the two hot finishers, Denver and Seattle, neither of which even made it to the Conference Championship. When it comes to investing, sometimes stocks go up (or down) too much. Trading isn't for everyone, but sometimes stocks experience moves that justify at least a partial sale if not complete removal from one's portfolio.
I know what you are thinking! I already talked about Beyoncé. She was only on for like 15 minutes, what else could there be? The point I want to make here is that there is a whole lot more to Beyoncé's performance than just her, and she would probably be the first to admit it. On the field, sure, QB Joe Flacco was MVP, but could he have won the game without the heroic efforts of Jacoby Jones, who ran back a kick for 108 yards and had a heads-up play to score a receiving touchdown? What about all the others who contributed?
When it comes to investing, you may not even realize it, but you are often betting on management. Many people look to just the CEO, but no company can survive on just one person's efforts. It takes a team! I spend a lot of time evaluating management teams, and I think it's a great use of my time. I am always careful to avoid companies where it seems like a one-man show, and I give preference to leaders who develop strong teams.
So, I have shared six lessons from the Super Bowl that I think can make us all better investors. I am sure I missed some and look forward to hearing some others from you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I mentioned CSCO in passing. It is currently one of the stocks in my Conservative Growth/Balanced Model Portfolio at Invest By Model.