The plays and teams can change, but the message is the same.
Our annual Super Bowl reminder with stories from our previous posts with an NFL insider, Jeff Locke, based on his five years in the league.
How are investing and the NFL similar?
Both environments – the NFL and Wall Street – encourage emotionally-charged, seemingly chaotic, fast-paced action.
Participants in both also tend to perform much better when they do the following:
Keying on the first, and maybe most important bullet, it’s hard to stay focused on the simple, boring basics – especially in the heat of the ball or market game.
The fancy play or exclusive investment deal always sounds great.
What’s the problem?
Identifying them at the correct time and executing them with consistency is almost impossible.
As Jeff continues to say:
“In the NFL, new training methods, supplements, techniques, and plays are often pitched as the key to winning.”
However, as in investing…
“I’ve seen many cases of the new idea getting a team off their long-term plan.”
“Fancy schemes always sound great, but what consistently contributes to winning is repeatedly executing the basics.”
In saying this – again – we’re not suggesting that either in football or in investing you shouldn’t keep your eyes and ears open.
You should be open-minded and consider all ideas carefully.
Back to our last bullet point above, though, the data shows that the key to success is an ability to stick to a long-term plan and consistently implement strategies that have the highest probably of success.
To help drive this point home, let’s compare the probability of becoming an NFL player to investment ideas and funds.
The chance of a high school football athlete playing any level of NCAA football is approximately 7%.
The chance of an NCAA football player then making it into the NFL is about 4%.
So, on average, a high school player’s chance of making an NFL team is less than 1%.
The same is true in investing.
Star investment strategies and players are extremely rare and almost impossible to place in a portfolio at the correct time.
As I wrote in a piece titled Say It Ain’t So, which is based on my own experiences as a past Wall Street Managing Director and top promoter of complex investment strategies…
We all want to believe in outliers.
And it’s not easy to stay anchored on simple solutions.
We are constantly blitzed with highlight reels – in this case, almost daily commentary in financial publications or presentations from various investment firms that highlight the most recent top performing investment strategies.
What do investment stats say about this constant play-by-play?
A good place to start might be Wall Street’s ability to call winning or losing plays at the correct time.
Consider the last two years.
Wall Street’s median forecast was for stocks to be up over 10% in 2018. They were down almost 10%.
For 2019, many were predicting “doom” for U.S. equity markets. They were up over 30%.
And how many correctly called 2020?
To learn more about this read Fallible Forecasts, which has references to charts and quotes that many forecasting gurus “hope you forget.”
What about star managers who purport to be consistent alpha players?
Consider the chart below.
It illustrates what we’ve coined Relative Alpha® funds – like NFL players, investment strategies that have performed in the top echelons of the sport.
Percentage of Relative Outperformance Over the Past 15 Years
Period Ending 12/31/18
How could you have participated in funds that performed at this all-star level?
By investing in index funds.
For details on this, read our Relative Alpha® post and the important P.S. at the bottom.
Finally, what does the evidence show about those who are generally considered to be the top talent scouts of the investment industry – institutional investment consultants?
Consider this quote that one of our research partners wrote about in a piece titled, “Are Selectors Good at Selecting?”.
“We find no evidence that [active management] recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless.”
Strong words for sure, but again Jeff’s experiences in the NFL match up.
“Players who consistently perform at the highest level stay focused on what sounds easy, but is hard – the simple basics.”
As in the NFL, complex, big play pitches sound great, but many investment players overestimate the probability of success.
The deeply rooted belief in skill that is necessary for players and business professionals to perform at the highest level tends to be the exact thing that gets them into trouble in investing.
From what we’ve experienced time and again, investors would be much better off if they kept it simple and followed this advice from one super star to another.
“Everybody’s got an idea… and usually simplest is the best.”
– Warren Buffett’s advice to LeBron James
We couldn’t agree more.
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