The Trade Deadline
If you aren’t a baseball fan, you might not know what the trade deadline is. However, die-hard baseball fans agonize over this day at the end of July every year. It’s the last day of the baseball season when teams can trade players without first passing them through waivers. After this date, if you want to make a trade, you first have to put the player on waivers so any team in the league can claim them.
If your team is in contention for the playoffs, as our hometown Orioles are now, fans are hoping for the team to acquire new players that might help push them over the top for a World Series win. If your team is well out of contention, as the Orioles were for too many years, fans hope to trade their older, expensive players for exciting young prospects who might develop into their next winning team. With 32 teams all trying to improve for either this year or the future, deadline day is full of excitement and activity. This year, there were 32 deals on deadline day, plus another 27 in the last few days leading up to it.
As a baseball fan, I enjoy tracking the rumors about who we might be looking to trade or acquire each year. However, I feel awful for the players who don’t know what city they’ll be playing in or when they’ll need to move their families. It’s a difficult situation for players, although often, they wind up in a better place, too.
The fan reactions to the deadline are an interesting case study in human behavior, and I can’t help but think about the parallels to the world of personal finance. We often see many of the same emotional reactions to what’s going on in the markets. Here are some of the reactions I see most in both worlds.
Just Do Something! Baseball is entertainment, and fans want to be entertained, so many of them want their team to do something, no matter what it is. Those same fans will likely be the first to complain about the move if it doesn’t work out. Investors often feel the same way when markets move. After a few down days in the markets, we all feel we should do something. Maybe we want to “buy the dip,” thinking the market will go back up, or maybe we panic and want to sell everything in case it drops further. Yet it’s important to remember that investing your portfolio should not be seen as entertainment, it’s a resource that will provide for you in the future. Leave the entertainment to the athletes and actors and try to ignore the market noise.
I know what they want! At the deadline, fans often say, “Why would we have traded player x for player y when instead we could have traded this much worse player for him?” This implies that the fan knows more about what the other team was willing to give up in the trade than what our general manager knows. This same general manager has been in constant communication with other general managers and knows exactly what other teams are looking for and willing to offer. Despite all the information available on the internet, nobody else knows what is said in those conversations.
Similarly, you might think you know what the market will do next or what a specific stock will do after their latest earnings call. But there is no way you can guess what the individuals and institutions holding those stocks are thinking and how they will react. Markets are complicated because millions of investors make individual decisions that they believe are best for their situation, and there is no way for you to know what those decisions will be or how they will impact prices. Sometimes it’s best to admit what we don’t know and stop trying to predict the future.
I’m smarter than everyone! Similar to fans who claim to know what the other teams want are fans who think they are smarter than the people who run their team. While there are undoubtedly poorly run sports organizations, most of these people have their jobs for a reason. You might follow your team passionately, but these people spend all day striving to improve their teams, and they have incredible resources to help them. The same is true for professional investors. If you try to buy and sell individual stocks, you are trading against professionals with far more knowledge and resources than you have. This is why we prefer a mostly index-based approach to investing, where you take the market returns and don’t try to beat the professionals at their game.
Things have been bad lately, we need a change! Aaron Judge is probably the best hitter in baseball right now. Yet he went through a two-week period in April this year where he only had six hits in 42 at-bats, for a .142 average. He was still hitting under .200 at the beginning of May, over a month into the season. Given his background as an incredible hitter, nobody was calling for him to be benched, though he did get a few boos from the notoriously impatient Yankee fans. In Baltimore, a rookie named Colton Cowser got off to an incredible start to the year but then went into his own awful slump. Fans and some sports talk radio hosts went as far as to call for him to be sent back to the minors, but the front office remained patient, and Cowser rewarded them by battling his way out of the slump.
Markets go through their own kind of slumps; we call them corrections. Every time the markets dip by 10% or more, some panic. Nobody knows if this will start a more extended bear market or if it’s just a normal correction from which we’ll bounce back. More often than not, markets bounce back, and those who panicked and sold wish they hadn’t. As an investor, it’s important not to overreact to short-term market moves. Unlike the baseball front office, you have a long-term time horizon and can afford to wait for the market to come back. Players can only slump for so long before they get cut or traded.
I don’t care about the future, only this year matters! The Orioles haven’t won a World Series since 1983, when I was one year old. It won’t surprise you to learn that I don’t remember that one and would love to finally see them win it all. Unfortunately, baseball is a game of randomness and luck. It takes a lot of talent and a good team to make it through a grueling 162-game season, but any team can get hot and win a five or seven-game postseason series. At the deadline, you hear fans saying we should trade all our prospects for the best players, even if we’d only have them for one year because it gives us a better shot to win the World Series. That might be true, but it doesn’t guarantee anything, and the best team on paper rarely wins it all. It makes much more sense to build a team that can be a winner for many years and hope that in one of those years, everything comes together in October for a win. Many people take the same approach to their personal finances, maxing out credit cards to take that dream vacation because “you only live once!” However, if you plan well and are smart about your spending and saving, you might be able to take lots of nice vacations in the future if you don’t overspend today. As with everything in life, there’s a balance between having what you want right now and having what you want in the future, and it requires sacrifice to have both.
Sports and finance might seem very different, but human emotions don’t change. Sports are a great place to express these emotions because you are just a fan, and you aren’t in control of what your team does. But you don’t want to carry over those emotions to your finances because they can and will impact your life in many ways. The next time you are watching your team or talking to a friend about the latest transaction, step back and try to take the emotion out of it. You’ll probably realize your passion for the team is clouding your vision.
The best way to make sure you are not letting emotions cloud your financial decisions is to have a partner who can give you objective advice without the emotions. That’s exactly what we are here for. Feel free to reach out to us anytime to help with your own financial decisions.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.