With the NCAA basketball tournament in full swing, anyone who is interested in "March Madness" has filled out their brackets. Some are happy with their picks, though many are disappointed their favorite team is out of the running.
While it helps to pick the ultimate winner, the best strategy is to be sure you select enough teams that will survive through the early rounds. In many ways, picking teams for the March Madness tournament bracket is similar to developing your stock portfolio.
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It's All About the Odds
If you arrive at the last couple of rounds (the Sweet 16, the Elite Eight and the Final Four) with more teams than anyone else, you have a good chance of winning your pool. When you're picking stocks that have a chance to beat the market average, the same logic applies. As your winning picks progress through each level, you collect more points. The more stocks you pick that do well the more your portfolio will reward you. If you arrive at the final rounds with more teams (or stocks) still playing you will likely win.
While it is wonderful to pick the winner, the probabilities work against you. Like putting all your money in one stock, you leave yourself open to disappointment should the game or stock not work out as you hoped.
A portfolio of good stocks based on the factors that you deem important is more likely to deliver the profits you expect. While one or a couple of your stock picks might disappoint you, the remainder will deliver good results. As long as you are beating the average, you are ahead. (Learn about how March Madness can affect players' careers; read The March Madness Effect.)
Here are a few good strategies that apply to your tournament selections as well as to stock picks.
- Don't pick with your heart.
Picking a team just because it is your alma mater does not mean it will win. There needs to be more fundamental or technical reasons to pick a stock or a team. The counter to this is if you like a stock for solid reasons, then it might be a good choice. Maybe your shopping trips have shown you that a certain retailer has lots of traffic and people are carrying their bags more than others. This is a good sign your favorite retailer might be doing better than the rest of the crowd.
- Coaching experience matters.
Quality coaches can make a difference. The same holds for corporate management. If management has the experience and proven skills to navigate the company, this can be a good pick. Quality management is one of Warren Buffett's most important rules in picking winning stocks. (Learn more about Buffett's techniques in Warren Buffett: How He Does It.)
- Be careful picking upsets.
While they can be exciting, they are dangerous if they do not win. Buying a high-risk stock with an unproven track record might be exciting until it fails to deliver the profits you expect. That doesn't mean you shouldn't have one or two potential high flyers in your portfolio; you just don't want to stake your entire fortune on them.
- Do your homework.
There is a wealth of data on the teams and the probability of them making it to the next round. The same applies to stocks. Good research gives you a leg up on everyone else.
Financial Slam Dunk
Winning your pool is exciting. If you follow a few good rules, you have a better chance of coming out on top. Like picking stocks for your portfolio, if you follow well-founded rules your chances of owning a winning portfolio will increase. Good luck in the tournament and in growing your portfolio.
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