Honestly, how many of you had Baylor University taking the NCAA Men’s basketball tournament, a.k.a March Madness?
Maybe some of you, maybe even a lot. Unless you’re fibbing.
But how many of you got every single team right in your bracket? Essentially, that number is zero. It’s always zero and likely always will be zero.
The longest a bracket has remained “perfect,” according to the NCAA, is 49 games (out of 64). That happened in 2019.
Your odds of getting to a perfect 64 — selecting every winning team — are calculated at 1 in 9.2 quintillion. If you’re squinting hard at that number right now, a quintillion is a billion billions.
We run a friendly, fun March Madness pool here in our office, as do many companies. Some of our folks are basketball crazy, but most aren’t and just pick a random, pre-filled bracket for the camaraderie and entertainment value.
Needless to say, it’s often the least sports-focused participants who do the best, and when you ask “Why did you have that team as your champion” the answer is something like “I don’t know. I just liked their mascot” or “Their logo reminded me of my old school.”
As investment managers, we often are asked by friends and clients what we think of the state of the stock market, and more often than not the answers we tend to provide are more along the lines of gentle assurances than actual investment ideas.
Why? Because the sheer amount of information in the market is similar to ridiculous math of guessing 64 winners in a basketball tournament.
Let’s say you know a lot about the inner workings of a company. Not insider information, per se, but you’re familiar enough with that company and its competitors that you feel comfortable investing in the stock.
Fine, but now you have to account for the things you aren’t likely to know — new competitors in the market, economic headwinds, supply chain issues, consumer demand, brand strength. The risks of weather, labor unrest, currency moves, the cost of credit, and more.
Nerves of steel
Now try to account for the thousands or even millions of other investors who also own shares of your chosen company. Will they stay in the stock? Sell it to buy something else? Buy more? If the dividend is cut, how many will bail out the next day?
How many will buy more anyway? How many large funds will buy or sell stock automatically, based on arcane signals?
It’s a lot to consider, and all of this assumes rationality across the board — which is never guaranteed. Sometimes a company does well and the stock goes down anyway.
If you have nerves of steel, maybe you buy more as it falls. Until your nerves give out, that is.
Now, multiply that already crazy set of variables by 500 companies, 3,000 companies or more. It makes picking 64 basketball teams suddenly seem reasonable, doesn’t it?
And that, ultimately, is the answer to the question we get as investment managers: “What’s going to happen with the market?”
The honest answer is that some stocks will go up and some will go down. The long-term experience, however, is a net increase in the value of invested capital, if your holdings are sufficiently diversified.
It’s not an exciting way to talk about investing. People like betting. They like picking winners.
But decades of research data support one essential truth: Owning the stock market is a powerful way to invest for the long term, and it’s a method that is both cheap and effective compared to the riskier alternative, which is stock picking.
Stock pickers will tell you you can’t win by indexing, that you’ll only do as well as the market itself. We say hallelujah for that simple fact, because otherwise investing is mostly a guessing game.