What This Basketball Season Taught Me — Investing Lessons
A team is more than the sum of its parts.
Drawing parallels between sport and investing has been beaten to death. So, it’s with a heavy heart that I must do it again. Basketball doesn’t get too much print space nor grab eyeballs in India so I think it deserves its parallel moment. And as someone who loved basketball and cricket equally (almost) growing up, I need to do it. I’ll be honest and say that I don’t track basketball the way I used to anymore. I wish I did because the NBA season of 2019 has been nothing short of phenomenal and unfortunately, I was late to the party. With the finals starring the consistent Golden State Warriors (GSW) and the underdog Toronto Raptors, it has thrown up a lot of stories to draw investing parallels from.
A team is more than the sum of its parts. When the right players come together, it can be magic to watch. And the results are there for all to see. Michael Jordan and Scottie Pippen at the Chicago Bulls. Kobe Bryant and Shaquille O Neal for the Los Angeles Lakers. Stephen Curry and Kevin Durant for the Golden State Warriors. Lebron James and Kyrie Irwing at the Cleveland Cavaliers. And could it now be Kawhi Leonard and Kyle Lowry for the Toronto Raptors?
When you diversify a portfolio, you need to invest in asset classes and products that complement the other. Debt which is sensible and steady is complemented by the high return potential and go big or go home volatility of equities.
But the risk is not additive. Rather the common risks get cancelled out and you’re usually left with a lower risk.
In the short term, there is a degree of randomness associated with the sport. This could also explain why the playoffs and the finals aren’t a 1 game affair and it’s rather a 7 game series. At the end of the regular season of 82 games that each team plays, the Eastern Conference tables were topped by Milwaukee Bucks and Toronto Raptors in the first and second place respectively. When they met in the playoffs, the Bucks took a 2 game lead before the Raptors rallied to win the next 4 games. A longer horizon allowed the Raptors to go through the downs before recovering.
Investing can get pretty random too. The equity markets delivered close to 30 per cent returns in 2014 and followed it up with -5 per cent in 2015 and 2 per cent in 2016. If you’d invested 10 years ago though, your annual returns would’ve averaged out to 14 per cent. True results are seen if given a long rope. It requires patience to ride through the ups and downs.
When the Raptors traded one of their standout players DeRozan for Kawhi Leonard this season, they were aware that Kawhi had only played 9 games the previous year due to injuries. Yet they took the risk with the trade. They also got Marc Gasol who was traded in from the Memphis Grizzlies in return for 3 other players and a very forward looking 2024 second round draft pick. Big risks but with the first ever finals appearance and NBA championship win, I guess they’re not complaining.
Investing your hand earned money is a risky affair. You’re constantly going to be worried if market movement can work against you adversely. But in order to reach your goals, you will probably have to take on some risk to deliver the returns. And that’s okay if you give it time.
Going into Game 5 trailing 3–1 meant that the Warriors needed to win to keep their championship dream afloat. A short while into the second quarter, Kevin Durant of the Warriors fell to the ground clutching his calf. A few of the Toronto Raptors’ fans cheered and were seen waving goodbye to Durant. This was surprising given that Canadians are known to be among the most polite people in the world. The Raptors’ players quickly calmed the fans and they applauded him off the court while chanting ‘K.D.’. While the immediate reaction can be put down to the emotions of the crowd supporting the first-time finalists, the emotions were quickly reined in and an ugly scene was made right.
In investing, it’s important not to let emotions get the better of you. They shouldn’t cloud your better judgement in investing. If an investment does turn bad, be prepared to exit without letting your emotions or ego come in the way.
A black swan event is used to describe an event that is unexpected and difficult to predict. At the start of the season, the odds on the Raptors winning, let alone making an appearance in the finals weren’t in their favour. The Warriors were tipped 5/4 to win while it was 40/1 for the Raptors. But, not only did the Raptors make it to the finals but they’ve won it too. And the odds weren’t in their favour despite a good showing in the previous couple of seasons.
Similarly, an event like the 2008 financial crisis was something that was hard to predict. But they can and will happen. Be prepared and make sure your portfolio is diversified and has safe assets too that’ll help tide over such events.
A hot hand refers to a situation when a player is on a roll and making shot after shot. However, it has been shown that’s it’s actually a fallacy, something that we wrongly believe in. And this has been researched quite a bit. A new study however has found that maybe it isn’t a fallacy after all if we control for the difficulty of the shot. Let’s also look at what happened in game five of the finals. With the Raptors trailing for a large part of the game, the final quarter saw a resurgence and they took a 6 point lead with Kawhi having the hot hand. The Raptors coach then called a time-out. The Warriors scored 9 points to the 2 by the Raptors after play resumed. Did the time out ruin the hot play?
In Game 6, Klay Thompson of the Warriors had the golden (hot) hand but an injury kept him out of the entire 4th quarter and could’ve resulted in the loss.
There’s a style of investing called momentum which is a bit like continuing a hot hand. You buy into a fund or an asset which is doing well hoping it continues to do well. And there’s some research which suggests that momentum is favourable in the short term. So, maybe momentum isn’t such a bad thing after all. However, checking overconfidence is important.
Now you know, there are investing lessons to be learnt from everywhere.
This article was originally published by Nithin sasikumar on medium.
By Nithin Sasikumar, Co-Founder of Investography, a financial wellness company based in Bengaluru.
He can be reached at firstname.lastname@example.org