Those who know me know that I’m a sports fanatic. I admit it’s unhealthy. I wish I could change it, but I know I can’t. My mood on Mondays will always depend on how the Ravens did on Sunday. Walking down Eutaw Street at Camden Yards will always bring a smile to my face. And even though March Madness happens during tax season, I always manage to find time to watch my Terps and Bison.
Spending my work days watching the markets and helping people with their finances, I often relate sports to finance. Many lessons can be learned from watching sports and some of these lessons can also be applied to investing. This occurred to me as I watched a magical season unfold for my Baltimore Orioles. In case you missed it, “dem O’s” had gone 14 years without a winning season before this year. To put that in perspective, I was 15 years old the last time we had a winning record. Out of nowhere, with a roster full of guys nobody had heard of, Buck Showalter managed this team to the playoffs where we took the rich and mighty Yankees to a game 5. It was a season full of that old “Orioles Magic” and probably the best baseball season I have ever witnessed.
So what can we learn from this amazing season that we can apply to investing? Here are some of my takeaways:
- Don’t be a homer. - As an Orioles fan I only root for them and would NEVER root for the Yankees or Red Sox. Similarly, someone who works at Under Armour might want to put all their money in company stock and would NEVER consider investing in Nike. While I wouldn’t advise this person to invest in Nike, I also wouldn’t want them putting everything into company stock. Diversification is critical to successful investing and the perils of having all your assets in your company stock have been proven in cases like Enron and Worldcom. In the sports world it’s ok to put all your eggs in one basket, but don’t do the same with your investments.
- Don’t jump on the bandwagon – The Orioles had a great season and everyone is excited to be an O’s fan again. But does one good year mean they have turned a corner and will have an extended run of success? As a fan I sure hope so, but if they were an investment, I wouldn’t be putting my money with them just yet. For years they made bad move after bad move and gave us no reason to believe they were a competent organization. If a corporation or mutual fund went through 14 years like that they would probably be out of business. But if they managed to survive, and suddenly had one great year, would you want to invest in that company? Of course not. Wait until they prove the turnaround is for real.
- Stick to well run organizations – Unlike the Orioles, the Ravens have proven for years to be a consistent winner. It all starts at the top with a great owner who lets his great management team run the business. If you were investing in a sports franchise, the Ravens would be the type of organization you want to invest in. Sure they might have a bad year here or there, but you know they have a great foundation and do things the right way.
- Have reasonable expectations – When the Orioles recorded the last out in Game 5 this year I was disappointed. But I wasn’t upset. I came into the year expecting another losing record and I never thought I’d be in Camden Yards watching them win a postseason game in October. So the season had already been a success for me. Contrast that with the Ravens final game last year. You remember it. The Lee Evans drop and the Billy Cundiff miss. I was devastated. After 4 straight years in the playoffs and our 2nd AFC championship I thought for sure we were finally headed back to the Super Bowl. And then it all fell apart. My high expectations for the Ravens made their loss way more painful than the Orioles loss. Keep this in mind when you approach the markets. Don’t expect to return 10 or 11% every year. Don’t think your portfolio is going to beat the market by a few points every year. If you do, you’ll most likely be disappointed. Instead shoot for moderate growth rates and be pleasantly surprised if you beat it.
Sports can often make us irrational. Just listen to sports talk radio for a few minutes after your home team loses and you are bound to hear a caller prove this point. It’s ok to be irrational when it comes to sports. They are there for our entertainment. But don’t approach your financial life and your investments the same way you do sports. You need to be rational when it comes to investing. Your investments are there so that one day you can retire and live off your savings. Have a long-term plan and stick to it. In the future you will be happy you did. And if your team does make it to the championship, maybe you’ll be able to afford the trip to see it live.