INVESTING WITH CLARITY™ BLOG

March Madness Or Market Madness?

March 27, 2014 8:48:00 AM

Odds are it's the Money!

 

MARCH

-The odds of becoming a lightning victim in the U.S. in any given year are 1 in 700,000.

-The odds of becoming a movie star are one in 1,505,000.

-The odds of becoming the president of the Unites States are one in 10,000,000.

-The odds of becoming a Powerball jackpot winner are one in 175,000,000.

-And the odds of winning Warren Buffet's Quicken Loans Billion Dollar Giveaway are a staggering one in 9 quintillion! That's nine with 18 zeros!

These astronomical odds didn't deter over 8.7 million sports fans, or fans of money, from entering the Quicken Loans contest on Yahoo last week. The promise of easy money was not the allure (one in 9 quintillion is certainly a long shot); it was the sheer amount - one billion dollars. Similar to the lottery or Powerball, this ingenious promotion played to the public's greed and desire for free cash (which is only human nature); but this contest also speaks to the idea that the outcome is somehow predictable. It's not impossible, believe me, Warren Buffett said. There are 63 games that are going to be played, and I would say a good number of those are pretty predictable.

Many fans convinced themselves that with the proper research, knowledge of the league, conferences, teams and players, a contestant could improve their odds... and with a little luck, win the grand prize. But within hours of the tournament tipoff, 83% of the contestants were eliminated as Dayton beat Ohio State. Then Harvard upset Cincinnati and Mercer College eliminated the blue-chip Duke Blue Devils... and voila! There was only a handful of contestants left in the running.

We begin this week with Warren's money safe and secure - all 8.7 million contestants have been eliminated. It's not a big surprise. We know these types of contests don't hold a lot of promise when it comes to returns, but we play anyway - all for the fun and a sliver of a chance at winning. Entry was free, if you don't count giving Yahoo and Quicken Loans your private information, and it was fun to dream; but many investors take this exact approach when it comes to investing their hard-earned income. They chase returns, follow stock tips and look at past performances of stocks, indexes, and portfolio managers as indicators of future returns.

Just how big is 9,000,000,000,000,000,000?

That perfect bracket would be historic, choosing the winner of 63 games in a row. But number-crunching Professor, Jeff Bergen, demonstrated the mind-boggling math formula. Giving us the number that we call 2 to the 63rd, he said.

That means if you're just guessing, the odds are about one in 9 quintillion! That's nine with 18 zeros!

The odds are absolutely astronomical, said Daniel Ostrov, a professor of applied mathematics at Santa Clara University who also teaches statistics. Ostrov does not use the word 'astronomical' lightly.

Say you have a blue penny and you put it into a stack of pennies, he explained, and that stack of pennies goes from the sun to as far as Pluto gets from the sun, and then the stack comes back to the sun. And then you repeat that 500 times. The chance that you will pull the blue penny from that gargantuan stack of pennies is actually higher than beating the published odds for the 'Billion Dollar Bracket Challenge.' Ostrov adds that if we go back to the formation of the universe - some 13.8 billion years ago - and you filled out one bracket every second from then until present day, you'd have less than a 5 percent chance of actually striking the jackpot.

Who wins and who loses? March Madness Could Cost Employers $1.2B

The nation's employers have already played through the inevitable dip in productivity resulting from office pools and online streaming. With an estimated 50 million Americans participating in March Madness office pools, companies stand to lose at least $1.2 billion for every unproductive work hour during the first week of the tournament, according to calculations by global outplacement firm Challenger, Gray & Christmas, Inc.

There are distractions every day at the office, but the first week of the annual men's college basketball tournament is particularly hazardous to workplace productivity. While March Madness distractions may not alter the nation's quarterly GDP numbers, you can be assured that department managers and network administrators notice the effect on work output and company-wide internet speeds, said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

Employers are just thankful that the same amount of time isn't being wasted on following the stock market. There are still investors who follow it religiously and put themselves into a state of analysis paralysis though. They waste company time and hurt their own investments by doing so, all because they lack investment discipline and forget why they purchased shares of a stock in the first place.

So, what do March Madness and investing have in common?

Actually, a lot!

For starters, many investors view the stock market as madness. Additionally, when you look at the fear and greed that drive many investors' decisions, you might see madness as well!

As discussed earlier, many people spent personal and company time and energy trying to determine what teams were going to win their respective games. Unfortunately, there are just too many variables that can and will hinder one's March Madness bracket - much like investing!

Many investors continually look for the magic bullet in helping them make the right decisions when it comes to their investment picks. However, as I have written many times before, to enhance one's ability to be successful, they must have a rock solid investment Philosophy, Strategy, Flexibility & Transparency. Then all they can do is wait and hope for the Stock Market Madness to provide them the opportunity to continually invest in great companies for the long run.

This brings me back to an old adage I have covered time and time again... Addiction to prediction. The parallel between March Madness and the stock market really is undeniable. We would all like to believe we have the knowledge and foresight necessary to predict future occurrences, but there are just too many variables. We can analyze the stock market as much as we want, but it will never be sufficient enough to justify chasing returns. Returns are constantly shifting, as are NCAA basketball rankings and odds.

So don't take the long shot. Just stick to the knitting and invest long-term.

With that in mind, good luck with the rest of your brackets and happy March Madness!


Mark Pearson

Mark Pearson

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