Andrew Nelson

Sports and Investing: Identifying Good Process vs. Lucky Results

 

This past year has been great for both sports and investors (who have been investing in stocks). Think about the last 12 months we’ve had in each:

Sports:

  • Golden State Warriors blowing a 3-1 lead to the Cleveland Cavaliers
  • Chicago Cubs winning their first World Series in the last 108 years
  • Clemson vs. Alabama National Championship Game in college football
  • Tom Brady leading the New England Patriots in the largest Super Bowl comeback of all time
  • Roger Federer and Rafa Nadal play against each other for the Australian Open Final
  • Maybe the most impressive Serena Williams wins the Australian Open while pregnant!!!!

Stocks:

The S&P 500 is up over 15%, not including dividends, over the last 12 months.

International stocks have also made money with developed countries growing at almost 10% and emerging markets growing at a 16% clip.

 

A similarity that I wanted to touch on that I commonly see in both sports and investing is sticking to a process rather than focusing on results. For example, I was talking with a client last week and made the comparison of basketball and investing. In basketball, your process can be perfect, as in calling the perfect play, making the perfect pass, and getting a wide open shot. However, even with a perfect process you might miss the shot and not receive your desired result. Does that mean you never run that play again just because you missed the shot? Of course not! Over time the more plays a team runs that produce open shots the better. That’s a winning process that gives a team the best chance to produce winning results. In the same light, investors can have a winning process and due to variables out of their control, potentially lose money in their account. It’s also possible for an investor to make a decision that in long term most likely wouldn’t be viewed as “best practice”, but make money in the short term.

In the context of employer sponsored retirement account (401(k)’s, 403(b)’s, Deferred Comp plans, etc.) it’s not always evident what differentiates good process vs. “lucky” results. While good process can be defined many ways our firm has developed a few staples that we hope can help you as you look to develop your own process for being a successful long term investor.

Reduce investments costs: This has been mentioned in our blog and many other blogs/articles before us. It’s been shown time and time again that reduced investment expenses is a leading indicator for above average (relative to other investors) performance.

Past performance is not an indicator of future results: If you are someone who looks at the trailing 5 year return number as your leading indicator for what to invest in for the next year that’s most likely not a good process. Not to say that it can never work, but looking at your investment decisions more holistically and considering costs, correlation, and other variables over time can set you up for success. This chart, which will we will be looking at more in a later blog, speaks to consistently selecting funds that outperforms their benchmark is nearly impossible.

Buy and Hold: Investing is hard. If the stock market begins to decrease in value it’s difficult to tell if a 5% loss is going to turn into a 30% loss. It’s equally as difficult to determine if growing market is overvalued and is on the brink of a correction. Some words/stats of encouragement from a blog our firm likes http://awealthofcommonsense.com, as it relates to buying and holding are:

  • Stocks on average are up every three out of four years
  • Stocks on average fall 5% roughly three times a year
  • Stocks on average fall 10% roughly once a year
  • Stocks on average fall 20% or more roughly once every 3-5 years
  • Stocks historically are the best asset class for earning long term returns above inflation

So whether you’re a coach of an NBA team trying to figure out what play to run or an investor in a 401(k) plan trying to figure out what fund to invest in, remember that process trumps short term results.

Call us: 503.9053.100

Email us: 401k@humaninvesting.com

Sources:

http://awealthofcommonsense.com

http://us.spindices.com/spiva/#/reports

https://www.google.com/finance