This is a guest post from our friend Shaun Currie. Thought it was timely. And we do like sports betting!!!!!
It’s that time of the year – March Madness, the time of year in which brackets are in full bloom. But this year, there is a little more incentive to participating: Quicken Loans (with the help of Warren Buffett and Berkshire Hathaway (BRK.A) (BRK.B)) will award $1B to a participant that can get a perfect bracket. Though it’s unlikely that anyone will actually win the grand prize, top finalists will win $100,000 each (not a bad pay day for a free bet!). So the question is: How can I improve my chances of winning?
Well, since we talk about stocks and investing so much, let’s use some of this knowledge to try and give ourselves an edge in bracket-picking. I wrote this article because the skills we use to pick stocks and create portfolios are directly applicable to picking brackets. Plus, it’s just fun to talk brackets.
Where Is There Value?
We all know that there is a big difference between perception and reality. What a stock (or team) trades for (what its seeded) can vary drastically from its true value. For this portion of your analysis, I suggest that you take a look at some of the leading websites, like sagarin.com or kenpom.com, to get a ranked listing of the teams based on their statistical value (it’s the closest thing we can get to “valuation” for this practice).
If you see a 4 seed ranked 41st in the country, then maybe you shouldn’t think of them as a “4 seed” in your brackets. There’s a chance that this type of team might only be in the tournament for a “short” amount of time. Likewise, if you see Louisville as a 4 seed, yet they are ranked in the top 5 overall, it could be time to take them “long” into the final four.
What Is The Market Pricing In?
One fact to note for you brackets: In the first round, its typical for 8-12 upsets to occur. This is defined as a higher seed beating a lower seed. So how do you pick an upset? First, I suggest that you don’t take Weber State or Coastal Carolina. I know how bad you want to swing for the fences and be the person to call it, but it’s not happening – A 16 seed has never beat a 1 seed, and it won’t happen this year either.
In order to properly find upsets, I suggest that you put your “trader hats” on and ask: What is the Market pricing in?
For this, we will look at what market participants (bettors) are pricing in (through betting lines, or what investors would call “quotes”) for the individual games:
|8 seed vs 9 seed|
|Team (SEED)||Spread (Team on Left Favored)||Team|
|Pittsburgh (9)||-6.5||Colorado (8)|
|Oklahoma State (9)||-1||Gonzaga (8)|
|Memphis (8)||-2.5||George Washington (9)|
|Kentucky (8)||-4||Kansas State (9)|
|7 seed vs 10 seed|
|Team||Spread (Team on Left Favored)||Team|
|Texas (7)||-2.5||Arizona State (10)|
|UConn (7)||-4||St. Joseph’s (10)|
|New Mexico (7)||-2||Stanford (10)|
|Oregon (7)||-2||BYU (10)|
As you can see, “the market” is pricing in that two 9 seeds will win their games. Additionally, the market is also pricing in that it is less likely Kentucky loses its first round game than it is that Oregon does in a 7 vs 10 game. I like to look at this analysis to get a feel for “market participant perception” just as I would if I were trading.
Just to note, I think the best way to use this strategy is relative to others games on the same line (like comparing all 7 vs 10 games against each other, just like we do when comparing metrics on similar companies).
When In Doubt, Pick Teams That Have Done A Good Job Lowering Transportation Costs
After you have done all of your analysis, if it’s still too close to call, I suggest you take the team that is closer to home. There’s a better chance your fans show up, you don’t have to worry about time zone changes (like being an west coast team that has to play at noon on the east coast), and it just makes it easier to focus on the game, which could result in a better performance. Good luck to any team that has to play Syracuse in Buffalo, NY or Duke in Raleigh, NC.
Don’t Fall In Love With A Stock (Or A Team)
Do you have that one stock in your portfolio that has never really made you money, but you don’t want to sell it because you have convinced yourself that you’re in it for the long-haul? Chances are picking your bracket in the same manner will result in equal dissatisfaction. Maybe it’s your Alma Mater, or maybe you watched them as kid, or maybe “Pounce the Panther” out of Milwaukee is just the coolest thing you have ever seen; BUT I’M TELLING YOU NOW, DON’T PICK THEM!
Come’on, this is $1B we’re talking about here, straight from the Oracle’s pocket himself! Look at the data, form a thesis, and make the right selections. I promise that Pounce the Panther will forgive you.
It’s OK To Hold Onto One Flyer (But Only For A While)
Now I know this sounds like somewhat of a contradiction with the section above, but it is OK to hold onto one long shot into the sweet 16. Usually, at least one double digit seed makes the second weekend. Again, it’s not Pounce the Panther, but a team in the 10 to 13 seed range making the sweet sixteen is realistic. Some names I think have a higher likelihood include:
(12) North Dakota St or (13) New Mexico State
I will note though, odds say that the second weekend is the last weekend for these teams, so let’s take our gains in the sweet sixteen and not advance them any further.
So overall, we’ll let one speculative pick slide because the odds say it makes sense. Plus, it’s fun to root for the underdog; we’ll just call it our own personal Plug Power (PLUG)!
Trust In Good Management Teams
Just like investing in companies, teams should be given a premium valuation if they have strong management teams, or in this case very successful coaches. Teams like Michigan State, Louisville, Duke, Syracuse, Florida, and Kansas should be given a little extra value when filling out your bracket because they have experienced coaches that have won championships before. When it comes down to the final minutes of the game, wouldn’t you want to make sure that your picks are in trusted hands of coaches that have a history of strong execution? I know I would.
Make Sure “Blue Chip” Teams Are Weighted More Heavily In Your Bracket
Just like when you construct a good portfolio in order to minimize risks, make sure that your final four is weighted more towards the top teams. It’s fine to have a bunch of small positions (early round wins) in some of the speculative teams, but make sure that your core portfolio (the big games) holds top 10 teams. I have provided the top 10 list from Kenpom.com, a leader in statistical analysis on college basketball, below:
As tempting as it is to include the Ivy League in all the fun, I plan to have all of my final four picks come from the list above.
Risks For This Bracket Strategy Include:
- There are no risks its free!
OK, well if you want some risks (because we have to always ask ourselves “what’s the downside”)…
- You could lose your job because you spend the next 8 hours working on your bracket, and maybe your boss isn’t a basketball fan
- You could be reading this article, thus missing out on another article that could be making you money in the markets (but I’ll note: 1. This is a lot of fun so I don’t really think you’ll mind, and 2. I have you covered – just check out my Top Ideas for 2014 Article)
- I could be totally wrong and Pounce the Panther could be hoisting the trophy on April 6. That’s the fun part about March Madness: Anything can happen!
I hope that you enjoyed this article. I considering it a fun exercise on how to use your investing skills in other areas, and I hope that some of the information above helps you fill out your brackets better. I wish you the best of luck in March Madness! (well, best of luck to everyone except Warren Buffett.)
(My apologies to Mr. Buffet in advance – I’m a big fan)