Wrapping up this two-part series on investing through the lens of sports, David presents five examples of misguided thinking that are frequently repeated in sports and then draws a direct analogy between each of those and a similarly bad investing cliché.
Rule Breaker Investing
How Sports-Talk Radio Makes You a Better Investor (Part 2 of 2)
It's the Rule Breaker Investing Podcast with Motley Fool co-founder David Gardner. And welcome back to Rule Breaker Investing. I'm David Gardner. A pleasure to have you joining with me this week. We are talking sports this week. I started it last week comparing sports to investing, seeing some of the overlap between the two subjects, two truly passionate subjects for many of us. I'm certainly one of those people who loves both sports and investing. I realize, as I mentioned last week, not everybody loves sports. I hope you love investing, otherwise why are you listening to Rule Breaker Investing? You're wasting your time otherwise, but I'm assuming you're not that you do love investing. So that's a safe assumption, but it's never a safe assumption for me to look across our listenership and say, "You all love sports and you want to hear me talk about sports." That's why through the lens of sports, we're talking about investing. And this is a short series. This is the second of two. We'll be closing it up this week. And I'm going to be talking about five examples of what I consider to be lazy or sloppy thinking that is frequently repeated in sports, often parroted about. And I'm going to draw a direct analogy between each of those five and a similarly bad investing cliche, some bad investment thought that you'll often find out there, to show that there is overlap between these things. A lot of times, people will get some silly notion in their head. It happens to all of us, and it'll just begin to color their thinking. And they'll just think, of course, that's just a truism of sports, let's say. I gave an example last week. I'll repeat it again this week. Buddy healed the tremendous, probably the best basketball player in college basketball this year in the United States, had a horrible game in the biggest game of his life, just about 10 or 14 days ago. And the classic line, big time players show up in big games, which is so often used as I think a poor excuse for pregame commentary, or sometimes postgame analysis, was completely untrue in that case. Buddy healed is probably the best player in college basketball, and it was the biggest game of his life. He was up on a big stage. I don't even think he choked. He just had a bad game. Sometimes, big time players don't show up in big games. And that's kind of how I think about things. I like to look at the contrary side, whether it's sports or investing, and that's what we're doing this week. Now, before I start my list of five, I want to just catch up on one additional story I was telling last week. And that was, I was talking about my love of dice baseball, and I meant to continue the story just a little bit more and say that I began to write. This was my early pursuit after college. As a freelance writer, I began to write articles and send them into places about how somebody was misthinking some aspect of sports often baseball. And I got a ton of rejections. If you're a freelance writer, you know what I'm talking about. If you want to be a freelance writer one day, expect it. I did get a few pieces published though in the rotisserie baseball book, which was sort of the dawn of fantasy baseball. It was a book that came out every year published by Glenn Wagoner and a few other writers. And because he had seen some of what I'd written online, back then this is pre-World Wide Web. The year is roughly 1991-23 right in there. And so there wasn't a World Wide Web yet to talk on, but there were various private online services, whether it was America Online, USA Today had its own back then, a sports network. These were where you could be read and I was posting some stuff up there and he saw what I was saying. I was saying things like we're mismeasuring baseball using these fantasy baseball stats. Why are we using stolen bases as one of the four key categories that we're rating players off of when stolen bases don't really contribute a lot to a team's wins over the course of a year. I was saying those kinds of things and I lo and behold actually got published a few times in the rotisserie baseball books for a few years. But the profound change in me came when I realized as hard as that had been and as proud as I was to be published in a book a couple of years running, I wasn't going to make any real dent on the baseball world. It's a very closed world. It's hard to enter whether you're talking about actual baseball or just baseball journalism. And that's when I started to transfer my affection and associations from sports to stocks. And I highly recommend this for anybody who is a sports fan. Spend some new portion of your time. I still love sports. You do too. Looking at stocks in the stock market, listening and learning about investing, obviously I'm preaching to the choir through my podcast this week. But this was such an important change for me. I realized I will never get to be down on the field with major league baseball players and play ball. And if I did, it wouldn't be pretty. But you and I, every one of us, can be right down on the field of the stock market. Because if you pick stocks and you build a portfolio and you score what you're doing, you can compare that directly to every professional player out there. You can compare yourself to the best mutual funds and the worst mutual funds. You can compare yourself to me. You can compare yourself to index funds. The list goes on. All of us can be down on the field playing the game of investing. And the beauty of this is that when you win the game of investing, it is so much more lucrative than when your favorite NFL or baseball team wins the world championship. Something that you probably dream of. But the difference in the wins between you winning as an investor and what that means for your family and your future and those tied you versus your team winning, it makes me sad to think how many people love those NFL jerseys that they wear every Sunday. It means so much to them and I understand that up to a point. But once I began to mature as an adult, I realized we are really miss channeling some of our time if we're spending that much time watching sports when we could be playing the game of investing as well and truly changing our lives. All right, rant over there. Let me get to my subject, which is how sports stock radio can make you a better investor? And to shortcut right to the answer, the answer is that there are a lot of misunderstandings frequently put out there on sports stock radio, sometimes by fans, a lot of the time, sometimes by commentators and analysts. And when you see this become sort of so occur on that it becomes standard conventional way of thinking, then if you're a contrarian like I am, you start seeing the value and having a different opinion about sports or our topic, a different opinion from what everybody else thinks about investing. So how sports talk radio makes you a better investor is it makes you aware of the conventional wisdom. And if you're a fool, you start seeing ways to play around it. And I think play better because of it. Now, before I hit my list, I want to mention, ironically, I'm going to be on sports stock radio. I'm really looking forward to it. You can listen Friday at 2.30 p.m. of this week. If you like, I'm on WFAN, the fan in New York City, for an hour talking about investing in sports with Mike Francesca, the longtime host. I'm really looking forward to meeting Mike. He's been a fool fan in the past and he's having me on the show to talk some more about this subject perhaps, but not every one of us lives in New York City. But I'm sure probably if you Google WFAN, if you'd like to listen, you'll hear me talking more about this on Friday at 2.30 p.m. Eastern. Okay. Mistaken thinking number one from the sports world. And it's the whole glorification of the quarterback in the NFL. You probably have seen a lot of you watch the Super Bowl, even if you're not a fan, you'll see things like Brady versus Manning got to watch it Sunday night at 6 p.m. And so ironically, games are being marketed as if their chess matches between two people who never even face each other on the field. After all, the quarterback of each of the respective teams is only facing the defense of that team. It's really never nor has it ever been Brady versus Manning or L.A. versus Merino or the list goes on and on. The truth is it takes a lot of people to make a successful football team. And while a lot of our attention is naturally focused on the single most important player on the field, the quarterback, the reality is the importance of that player is grandly overstated and misrepresented because there are 22 players, 11 on offense and 11 on defense for every one of these teams, and you pretty much have to have them all doing pretty well to score or defensively to deny the other team scoring. After all, Peyton Manning's not going to do a lot with a high school grade offensive line. He's going to be the worst quarterback in the NFL. And not only that, but you're passing to receivers, you're handing off to running backs, right? So I hope I'm not going to belabor this point because we need to get to our investing point. But I hope it's clear that the whole idea of Brady versus Manning is completely not true. And further, the best examples I can think of real head-to-head matches are things like chess, you know, like Gary Kasparov against Anatoly Karpov. That really is Kasparov against Karpov for who's going to be the world champion. Now how do we map this back over to investing, all right? This is how I think about it. We tend to over glorify CEOs. It's all about Steve Jobs. It's all about Jeff Bezos. It's all about those visionary leaders, Elon Musk. And these are remarkable people and the world is much better for them. Certainly my portfolio returns are much better for them. I love each of the people that I've just mentioned. But the reality is there are thousands and thousands of people surrounding these CEOs. There are small groups of executives surrounding them that are making most of the calls. And then there are the entire cultures that are Apple, Inc. or Netflix, Inc. And these are really deep and important things. And we truly misrepresent and mistake our own thinking when we overrate the value of Steve Jobs. And how does this matter to your investing? Well, a lot of people I think we didn't. But I think a lot of people sold Apple stock when Steve Jobs died or they thought there will not be a good transition. It will be too hard. He's irreplaceable. I certainly have written, I wrote an article talking about my appreciation of Steve Jobs after his death. So I appreciated him as much as anybody, although I knew him much less than many others. I did meet him once. Maybe I'll talk about that some other podcast. But the reality is that Steve Jobs gave birth to an incredibly great culture at Apple. And people like Tim Cook and he's not the only one were very able to take his place. No one's going to replace anybody else perfectly. But Tim Cook does some stuff better than Steve Jobs and some stuff not quite as well as Steve Jobs. And let's realize that we shouldn't think in terms of NFL quarterbacks when we're thinking about corporate cultures or CEOs. In this case, I think you would have held your Apple shares if you agree with me. And that's been the right move over the last five years or so. All right. Sloppy sports thinking number two. I heard this line in fact spoken in and around North Carolina's run for the national championship this year in basketball because North Carolina in the final four faced Syracuse and North Carolina and Syracuse are both in the same conference and had played two times already that this season. And the line was quote, it's hard to beat a team three times period end quote. It's hard to beat a team three times. This is an example of just kind of cliche thinking you'll just hear people say it. I am using basketball as an example, but it happens all the time in any sport where teams are meeting a few times. And in fact, I just kind of googled this because I knew this is sort of a silly line. And I found a good article from the sports post, which is an online publication. They have a lot of articles about sports and just googled this and they did the numbers. This is a 2014 article looking at the NFL playoffs. So teams had met twice in the regular season and then they're going to clash for a third time in the playoffs. And over the course of the history that this has happened in the NFL, it's happened 20 times. And just a shortcut right to the end turns out 13 of those times, the team that won twice won a third time, right? So not, not every time it, it, it's not automatic. But if you think about it, why did that team win the first two games in the first place? And our circumstances and factors probably still in place, superior talent and personnel, superior strategy coaching, aren't those probably in place a few weeks or a month later when they meet for a third time? And as it turns out, at least in the NFL, more than twice as often, the team that has already won twice will win a third time. It stands to reason for me, I hope you too, but it's amazing how often you'll hear people say, well, it's hard to win, hard to win a game, be the team three times. How does this map to investing? Well, I'll tell you, a lot of times people think it's hard for a stock that has been winning to keep on winning. And I would say of all the various bits of advice that I could give you, one of my top five would be as an investor, remember that the winners tend to keep on winning. And so if you think a stock quote has run up, end quote, I think you're thinking backwards. You're looking at what's already happened. And you're forgetting that things that go up tend to keep going up Newton's first law of motion unless acted or counteracted by additional forces. And for the most part, what I've found is that the great stocks are great stocks, not because they're stocks, but because they're great companies. And those great companies keep doing the great things in the world and executing and always make some missteps here and there, of course, as well. But for the most part, we are rewarded as we buy winners. It was William O'Neill who wrote in his book, How to Make Money on Stocks, which I think is in some ways the best and also the worst book I've ever read on investing. But at his best, William O'Neill studied and found out that the better stocks to buy are ones hitting 52 week highs rather than 52 week lows. And this goes very much against most people's expectations. When you hear buy low, sell high a phrase that I've certainly ran it about in past and will be happy to do it in the future on this podcast. But buy low sell high, it has too many people looking for what's downtrodden as if it's going to be a great deal that you're finding at 75% off. But you're going to be much better served more often than not when you remember that it's not so hard to beat a team three times. And the winners typically keep on winning misguided sports thinking number three. This one comes in a few different guys is but we'll go, I'll give two examples. Good pitching beats, good hitting. That's from baseball. You'll hear that quite a lot. Similarly, this is used in many sports defense wins championships. So these are on the face of it completely silly, but we can understand why people think this. Why is it silly first of all? Well, in any sport where you're trying to outscore the other team, both aspects of your game are important. You need to score in order to win and you need to deny the other team scoring. And to take just one half of that and say, that's really what it's all about is just on the face of it illogical. The reason I think people think this is, well, let's just go back to baseball. The pitcher will get the batter out about seven times in 10. So 70% of the time, this is even against good hitters, pitchers will succeed. And on the other hand, even the best batters will not succeed even four times out of 10 against pitchers. You could see why people would therefore conclude that good pitching beats good hitting because that's true anyway. But it's not to say that defense wins championships or it's all about the pitching. The truth is, it's about both of those things. And some teams win championships because they flat out have the better offense. Their offense is better than the other team's defense more so than the other team's offense is better than their defense. I hope I didn't confuse things by talking too much or too long about this. It's pretty obvious. This is a, like, like a lot of these, I hope these are things you can see through pretty quickly and you don't have to be a sports fan to see this. But it's amazing how many people in sports are drawn in by the mysticism of these often uttered conventional wisdoms and it becomes a truism in their minds and it sounds really smart to say defense wins championships when you're a pregame analyst or postgame analysis. If you're on television in front of everybody and you say that, people say, yeah, that's sound. That sounds smart. That sounds right. Okay. How does this map to investing? Well, here's a similar example. Let's go with low PE stocks, beat high PE stocks. I'm talking here about the PE, the price to earnings ratio and it's a term we're not going to go too far forward in defining this week because we have other things to talk about. I've talked about before. I know a lot of listeners know what a price to earnings ratio is. But it's often put out out there that value stocks, beat gross stocks are the ones that have really cheap prices do better. I'm always questioning those surveys and asking, how are you measuring what's a low PE stock and what's a high PE stock and over what periods of time, et cetera. Frankly, in the end, I don't actually care if that's true or not because all that really matters to you and me are which stocks we buy, which stocks that have a PE high or low. We're not buying all of them. In fact, I certainly, having made a living and done pretty well beating the market on typically higher PE stocks, there are many price earnings ratios that I don't think are worth paying up for. There are many companies that are mediocre on the stock market. Last year in the SAP 500, it was only a handful of stocks fewer than 10 that brought up the other 490 plus and made it a winning year. There was just a tiny percentage of the overall market brought the whole market up because of its averages, just how well Netflix and Amazon and a few others did last year. In the end, my reflection is you and I, we only have to buy Netflix and Amazon. Frankly, if you're with me, we're already investing in those companies and have been for more than a decade in both cases. We don't have to buy all the high PE stocks, but I also don't believe that low PE stocks are worth focusing that much on. I tend to focus not on PEs at all, but on the excellence of enterprises and their sustainability. It's wins championships, I'd say about half the time and low PE stocks beat high PE stocks, I'd say about half the time and in the end, all that really matters is what you and I own. Okay, misguided sports thinking number four. This one isn't as classically phrased as something like defense wins championships, but I'm just going to go with this concept that it's all about the big game. It's all about whatever is going to happen in this very next game. One ready example comes quickly to mind and that would be the college basketball championship that happened last week. The irony and sadness of college basketball is that you only ever play one game. It's also true the Super Bowl. You just play one game to see which team is going to win and it makes it all about the big game. So the reality is if you were to play the National Basketball Championship or the Super Bowl three out of five games, you would often have a different result than the one game that was played that allowed one team to be heroes and the other goats or somebody to be immortalized. And I think you have to love that about the Super Bowl and about college basketball's championship when it all comes down to that one big game. But we start to mistake ourselves if we think the better team always wins, that it was all about that big game. The better team often does not win. In the case of Villanova in North Carolina in basketball last week, Villanova was the better team. So I think it did win. But it was about a coin flip between those teams and frankly, the ending was kind of a coin flip itself as well. And on the other hand, if you looked at the first round and you saw Michigan State, which was an outstanding basketball team this year with a world champion coach and had a great season and they were at two seed and they lost to a 15 seated team. And I assure you that middle Tennessee State University, which played one of the more memorable games in recent college basketball history, is by no means nine points better than the Michigan State Spartans. In fact, the very next game, middle Tennessee State kind of got blown out by a team much worse than Michigan State. So I hope you already get this, but I'm not sure a lot of people do. The better team does not always win and the way you can tell who the better team is is usually based on empirical results over the course of an entire season. That's why I love things like, well, in the case of basketball or football, I like to follow the power ratings made popular through USA Today, specifically Jeff Sagerin's power ratings. Take into account over the course of a season every single game a team played, whether it was played at home or away because that really matters. How many points the game was won or lost by because there's a big difference between a 15 point win and a one point win. And finally, who they were playing and what was the quality. And so over the course of an entire season, you can see with pretty good probability and understanding which team deserves to win, but you and I know that in a single game format, you're never quite sure in that one game, whether in fact, middle Tennessee State could win. And when they do, we celebrate them, they're the underdog, they're the game we'll always remember, but let's not start confusing ourselves in thinking that they're actually better than Michigan State. They were for one memorable night. Okay. How does this map back to investing? Well, if it's all about the big game and some sports, I think for a lot of investors, it's too much similarly all about the big year, i.e. this year, this one year, it's amazing to me how many people care so much about how the market's going to do this year, or they worry about a big drop this fall. That kind of thinking so focused on the short term, so worried often, especially if the market has had a good few years, waiting for Damocles sword to inevitably to drop down and knock the head off the market for a year or a season, maybe just a month, and it's too much the focus is on just the here and now. And the reality is the stock market, like a great team that's won over and over the course of months or years, the stock market will perform more often than not in any given year or month or day. It could have a really bad loss and upsetting loss. Middle Tennessee State can beat the stock market from time to time. But if you're focused beyond that one big game and you know the probabilities, you know that you're so well served to keep betting long on the stock market as a co-owner and an investor, a foolish shareholder. And then let's close it out this week with wrong headed sports thinking number five and this one kind of keys into our previous one when we make it all about the big game, the one shot. I'm just going to talk about clutch, operating, hitting, scoring, performing in the clutch. Most people who've studied this from Bill James of baseball fame right across Nate Silver, a lot of people who are looking at different sports will tell you that while it's definitely true that some people will score in the clutch, like Chris Jenkins, who won the National Basketball Championship for Villanova by hitting a long shot with less than one second left for three points and winning it all. That was incredibly clutch, but it doesn't therefore follow that Chris Jenkins himself is quote clutch end quote and when you study athletes and you repeat the studies like you keep seeing in that situation, will that person keep doing it while you and I may say, you know, Peyton Manning is clutch and look at all his championships and we can certainly see winners winning. The reality is there is not a tendency by almost any athlete, at least in sports very measurable like baseball to say they consistently every single time hit better in the clutch than they do in normal circumstances. And so this is really an important point. People I'm saying are not so much clutch. It's the moments where they act where you're coming through in the clutch. And there are innumerable examples of the best player in the game not coming through in the clutch at the end of many games, but we tend to forget those. They don't enter into the mythology and the story, the legend of that player. And so we discard them as examples we won't focus on. And so we tend to end up with this idea that there are clutch players and it's a controversial subject and I'm not really trying to open up a big barrel worms here, but I do want to map this thinking right back to the markets. So one of the interesting things about the idea of clutch is that there's a fine line between who's clutch and who's not. The shot that goes in could have been three inches off and hit the rim or bounced away and the story would be completely different. There's a fine line between winning and losing. And in the markets, I think it's exactly the opposite. Winning and losing is never about clutch investing. There's no short term or emotional imperative for you or me to make a great call right at the market's bottom and that is clutch. So I discard that altogether, but what's ironic in sports is that the wins that are most memorable are the ones that are nearly a coin flip. It comes down to a single shot in the Masters in Golf or in the NCAA championships for basketball. The ones that we remember are the ones that were just such a fine line between winning and losing. But in investing, it's the exact opposite. After all, the biggest winners for us, well, my three biggest winners and Motley Fool's Stock Advisor are up 49 times, 53 times, and so they're like 58 times in value each. So they are way, way ahead. The most memorable wins for us as investors are way ahead of our worst losers. And I've had more bad losers than anybody else at the Motley Fool. Some of my biggest losers have lost, I've talked about these before in our podcast, 90%. Horrible losses, but the difference between making 50 times on your money and losing 100% of your money is dramatically different. And so our best moments as investors are not even close in terms of their outcomes. And our best moments often as athletes, or what we remember as sports fans, are ones where it was practically a coin flip either way. That's why I prefer, by the way, investing. I like my wins to be big and obvious, and I like my wins to far outshine my losses. One of the unique ironies of the NCAA basketball tournament is that of the 68 teams that enter 67 walk away in sadness, only one team walks away happy. Good news, that's not how the game of investing works. All right, I've had a lot of fun. I hope I haven't indulged myself too much these two weeks, because I do love thinking about sports, and I had the opportunity to talk to you some about them this week. But I hope I made clear it's really not about sports. As I said last week, we're talking about how you think. We're talking about thinking, and trying to think clearly and see clearly, so that that can lead to clearer action. And in my experience, there are a lot of muddled thinkers out there in the world of sports and in the world of finance. And you and I have an opportunity to not exploit that, but to think different, and I think act better. I'm David Gardner. Thanks a lot for joining me this week for Rule Breaker Investing Next Week. It'll be a whole new ball game full on. As always, people on this program may have interest in the stocks they talk about. And the Molly Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com. [MUSIC] [BLANK_AUDIO]