Sunday may be the biggest unofficial American holiday of the year. The Super Bowl (XLVII) and its surroundings offer some pretty good lessons for investors too. Let’s look at seven (VII) of them.
1. Math is a major edge. Apparently a fair amount of money gets bet on and about the Super Bowl. Who knew? Anyway, winning as a gambler is tough generally, but there are a number of Super Bowl bets where simple math demonstrates that the line is off (in terms of reality if not in terms of equalizing the bets). For example (and as Bill Barnwell points out), the likelihood of overtime is only about half as likely as the betting line suggests (+700 on overtime happening implies overtime about 12 percent of the time but it actually occurs only about 6 percent of the time). Betting on a safety being scored at +900 implies that it will happen nearly 10 percent of the time even though the real number is more like 6 percent. Factor in the relatively weak pass rushes of each team generally and you should clearly take the other side. Similarly, there are any number of bets the existence of which demonstrate the impact our cognitive and behavioral biases have on us. For example, we overvalue bets at the extremes because we are always looking for the big score (despite the odds against it — think your state lottery) and are willing to pay too much for insurance against the highly unlikely due to our risk aversion. An obvious example is betting that the 49ers will score a total of 4 points in the game at +9999 (it could happen but never has and is vanishingly unlikely — the odds should be much, much longer). If you know and can apply it, math is a major edge in gambling about football as well as for investors.
2. Evaluation matters. Over the past 12 years, the Baltimore Ravens have been to the play-offs 9 times and are seeking their second Super Bowl win Sunday despite the lack of an elite quarterback. Much of the credit for this success should go to General Manager Ozzie Newsome and his ability to evaluate talent. In his first draft he took Jonathan Ogden and Ray Lewis with his first two picks. Both will be Hall-of-Famers. Despite doubts from scouts, he selected Ed Reed in 2002. He grabbed Terrell Suggs in 2003. The list goes on and on. You don’t succeed in NFL management or in investing without being able to evaluate the available options and to recognize quality.
3. Value matters. But good evaluation cannot stand alone. It has to be coupled with good value. In investing, as in football, it is possible to overpay for quality assets (in the same way that some assets are cheap for good reason). Finding good value is crucial to success. San Francisco coach Jim Harbaugh thought that Colin Kaepernick was more than the best quarterback in the 2011 draft. He thought he was the best player in the draft. But he didn’t pay more than necessary to acquire him. The 49ers selected now-star linebacker Aldon Smith in the first round and saw five other quarterbacks selected by other teams before nabbing Kaepernick in the second round. That’s getting value.
4. Don’t fail to commit. Anywhere in life — as in football and investing — it’s possible to have the right idea but fail anyway because of a failure to commit to it. Alex Smith was doing a very good job at quarterback for the 49ers but Harbaugh replaced him with Kaepernick mid-way through this season in an effort to get better. He even had to re-invent his offense during the season in the process. Few other coaches (perhaps no other coach, save perhaps my old New Jersey neighbor Bill Belichick) would have done so. There’s an old expression about bacon and eggs that says the chicken is involved but the pig is committed. Jim Harbaugh is a really great pig.
5. Smart people can be really stupid. Who knows what idiocy this year’s game will have to offer. But back in November, with fourth and 4 at his own 10 yard line, 49 seconds left in the first half and the score tied against the 49ers, Rams punter Johnny Hekker decided to go for the fake instead of punting. He connected on a pass to Rodney McLeod for a first down, but the decision was monumentally stupid in terms of risk and reward nonetheless. The reward was a first-and-10 on their own 31-yard line with 44 seconds on the clock. Scoring was still unlikely. Indeed, the Rams ran three plays from that point for minus-four yards and the half ended. However, had the fake failed, San Francisco would have had a first down at around the Rams’ 10 yard line. A score of some sort would have been a virtual certainty. Football coaches and investors alike need to align risk and reward properly. Moreover, success alone absolutely does not vindicate one’s process. Smart people can do some really stupid things. Of course, we can always count on stupid people being stupid. How else can you explain people betting on whether the coin toss will come up heads or tails at -102 either way or on which team will make the first coach’s challenge at -110 either way? No skill is involved in either wager and the odds aren’t favorable (except to the house, of course).
6. Learn from your mistakes. Since the Super Bowl hasn’t been played yet, I’ll use an earlier example here (reported in Grantland). During the regular season, the Falcons lost 31-27 to the Saints for their first loss of the season. When the Falcons scored early in the fourth quarter to cut their deficit to 28-23, they clearly should have opted for a two-point conversion attempt since a team will recoup more value by going for two in that situation if they think they can succeed just 23 percent of the time. But they kicked the extra point instead to leave them trailing by four. The Falcons would later kick a field goal on fourth-and-goal from the 2-yard line that put them down one instead of tying the game (the math says they should have gone for two there too), and after New Orleans kicked a field goal of their own to go back up by four, the Falcons were forced to go for it on fourth-and-goal from the 2-yard line at the end of the game and failed, losing the game in the process. After the game, Falcons coach Mike Smith said, “You don’t even start looking at the two-point chart until there’s seven minutes to go.” I get that it doesn’t make sense to start fooling around with two-point conversions too early, but there are still times where an extra point has nearly no value relative to going for two. This decision may well have cost the Falcons the game.
Even worse, Smith didn’t learn from his mistake and correct his process.
Against Seattle in the play-offs, Atlanta scored a touchdown to go up 26-7 late in the third quarter and kicked an extra point to go up by 20. But a 20-point lead as opposed to a 19-point lead only matters if Seattle scores two touchdowns (with extra points) and two field goals in the last 17 minutes of the game. That’s pretty unlikely (even four possessions from that point is unlikely) and Seattle scoring three touchdowns, while still unlikely, is much more likely and thus makes a two-point attempt the correct decision. And as football fans recall, that’s what happened. The Seahawks surprisingly took a 28-27 lead with 34 seconds left before the Falcons miraculously came back to hit a game-winning field goal as time expired. Had Atlanta converted a two-point conversion in the third quarter, the game would merely have been tied before the miracle — a much better position for the Falcons. That Atlanta recovered and won the game doesn’t (again) vindicate Smith’s process. That Smith should have learned from his earlier error against New Orleans makes this decision much worse.
7. Think outside the box. This phrase has been overused to the point of cliché, but the best thinkers are not afraid to go “outside the box.” Another of Newsome’s great decisions (together with owner Steve Bisciotti) was hiring Jim’s brother John Harbaugh as head coach in 2008. Harbaugh was a little-known special teams coach in Philadelphia when he was hired to coach the Ravens even though current Jets coach Rex Ryan, then the Ravens’ defensive coordinator, was the “obvious” choice. Typical thinking suggests hiring an experienced head coach or a coordinator, but Newsome and Bisciotti bucked convention and went with Harbaugh to great success. Another aspect of outside-the-box thinking is a willingness to extract helpful insight for unexpected places. Jim Harbaugh learned the value of committing to a decision (noted above) and more from Andy Grove, former head of Intel. It didn’t matter that Grove is essentially clueless about football and was opining in a different realm altogether. As Steve Jobs expressed it in perhaps the most effective advertising campaign of all-time (though I can’t verify that the commercial below aired during the Super Bowl, unlike the iconic Apple “1984” commercial, which transformed Super Bowl advertising), it can be extremely valuable to think different.
Enjoy the game. And when you do, consider whether (and how) anything that happens — perhaps even in the commercials — might have relevance to your investment process and thus to your portfolio.
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