With the end of the college basketball season this month, it means we are that much closer to the NCAA Men’s basketball tourney. It is one of the most exciting times of the year. From office pools, and online sites, to groups of friends, many fill out brackets trying to pick the winner of the tournament. Some take a strictly technical approach, while others go with their heart and pick their favorite team. Some even go for the underdogs. It is a time full of upsets, drama, Cinderella stories, last-second shots, and just downright grit.
Believe it or not, there are some similarities between basketball and your investment portfolio. So, what is the best game plan for achieving a solid portfolio? We subscribe to the following formula.
Learn the X’s and O’s. Understand the fundamentals.
Before you can play the game of basketball you must learn the basics – how to pass, dribble, screen, and shoot the ball. It is all about developing and understanding the necessary skills of the game. Wearing a pair of Air Jordans won’t suddenly transform you into Doctor Dunkinstein or a diaper dandy…Baby.
Knowing what you own in your portfolio and why you own is the key to investing. Do you understand the risks associated with owning a particular investment? What asset allocation matches my objective and goals? Have I done enough research? By learning the fundamentals of the market, you will be able to make the right investment choices for your portfolio. When it comes to your money, winning by 10 points beats the heck out of a buzzer-beater every time!
Be observant. Anticipate the (play) move.
The greatest players in basketball have all been recognized for having an acute awareness and vision of the court. The best example of this was Larry Bird. He knew exactly where everyone was on the court and what the other players were doing. His ability to anticipate and be ready for a play made him an active (not reactive) player in a game. Even Audubon would have been amazed watching this, Bird.
Anticipating the day-to-day movement in stocks may be impossible – spotting trends is not. While the market may not let you see its playbook, it does provide you with hints as to what it is going to do. This is made evident in the action of a particular stock or specific industry.
If the plays aren’t working, re-adjust the game plan. Change is good.
Every great basketball player knows that when your plays aren’t working you must adjust, and possibly adjust some more. The different strengths and styles of various opponents require different tactics. You must be able to endure and respond to whatever your opponent throws at you. Thank goodness for dry-erase boards.
The market will present you with many challenges over time. Your mission, should you choose to accept it, is to adapt and overcome the madness of the market. Asset allocation along with re-allocation provides you with the tool to adjust your portfolio to take advantage of and withstand changes in the market.
For example, if the economy is coming out of recession, then you might want to overweight cyclical stocks. Exposure to small capitalization stocks gives you a chance to invest in up and comers. And yes, being defensive at times is a good strategy as well.
Win more games than you lose but accept a loss and learn from it.
No matter what sport you play, you can’t win every game. One exception: the 1976 Indiana University basketball team. Go Hoosiers! (Sorry, just had to get our team plug in there somewhere). It takes hard work and sacrifice to win a championship. But there will be, more than likely, losses along the way. Michael Jordan once said: “I’ve failed over and over and over again in my life and that is why I succeed.”
Not every stock you buy will make you money. Even the best stock pickers own dogs that have flees or hope their stock gets a dead-cat-bounce. The goal over time, as cliche’ as it sounds, is to own more stocks that are winners. So, when you have a losing pick – learn from your mistake, understand why it did not work and how you can change the outcome the next time.
Game On. Are you ready for this?
There is a process in becoming a good basketball player; the same is true in becoming a good investor. It all boils down to understanding the fundamentals, being observant and learning from your mistakes. We all want to make money, but don’t get caught up with the Crowd. Let everyone else get hindered by the madness. The investing season lasts a lifetime, not just 30 games. So, stick with your game plan and re-adjust if needed. Remember this – keep your poise, ignore the noise, and your portfolio will reap the joys!