As we get geared up for the Sweet 16 this weekend, it's interesting to note how investing and participating in a NCAA tournament bracket pool share some similarities. To win an NCAA pool, you have to pick a bracket that beats your opponents by picking teams that win games and earning more points for correct picks than everyone else. In the market you have to pick assets that go up or down in price before your opponents get into the same assets, so that you have someone left to sell to, to realize your gains.
You get the most points in an NCAA pool by picking the correct Final Four and winning team, and the least amount of points for the early round games. In investing you usually capture bigger gains by taking a longer-term view and betting on big trends
So how do you win an NCAA pool? To broadly generalize, let's say there are two outcomes for your pool: If everyone picks the same teams, you are only going to win by picking the correct early round games. They are worth the least amount of points, and the totals are going to be close for your pool in this instance. Or if everyone picks different teams, then there's going to be one big winner since everyone is going to have a different Final Four which is worth the most points.
So you basically have two choices for how you want to beat everyone in your pool: Do you pick what you think everyone else's Final Four will be and try and beat them in the early rounds? Or do you pick a unique Final Four and crush everyone else when it comes time to collect the big points? Last year I was actually fortunate enough to win my NCAA pool by taking the latter Final Four strategy, as I will discuss next.
In my NCAA pool I essentially made two contrarian picks that allowed me to beat everyone else. My first contrarian pick was Syracuse knocking off Indiana in the Sweet 16. I knew that in my pool there would be a heavy bias towards picking Indiana to go all the way based on the people that were in the pool. So I was guaranteed that if I didn't pick Indiana I would have a big advantage on my opponents if they were to lose early in the tournament. Which is fortunately what ended up happening.
My second contrarian pick was choosing Michigan to go to the finals. I knew that virtually no one would pick this as well, so I would score a ton of points against my opponents if this was to happen. I did get a little lucky in that they came back and beat Kansas in a great game, but they were a 4 seed and it isn't uncommon for teams at that level to make the Final Four. The same goes with Syracuse, another 4 seed that surprised everyone in my pool by getting farther than they expected.
This year I decided to employ the same strategy for my pool. I wanted two unique teams in the Final Four that most people wouldn't pick, so that if I was correct I would make big gains in points on everyone else. This year my first contrarian pick was Virginia, which sounds kind of crazy since they are a 1 seed, but let me explain why.
Michigan State was probably the most overhyped team of all the teams entering the tournament. They had just won the Big Ten tournament, and they had injured players that were finally healthy. They were peaking at the right time, and even President Obama picked them to win it all. And more important than all of that, I knew there would be a heavy bias in my pool towards picking them to get to the Final Four, and also to go on and win it all.
So did I want to follow the herd and pick Michigan State like everyone else? Heck no! This was another big opportunity I wanted to take advantage of and make a contrarian pick. I picked Virginia to get to the Final Four instead. Want to hear something crazy? I was the only person in my pool to pick Virginia in the Final Four! If they beat Michigan State, I'm going to score big on everyone else.
My second contrarian pick was once again, Michigan. This wasn't quite as contrarian as last year, but I figured another popular team coming into the tournament was Louisville. Even though they were only a 4 seed I figured that most people wouldn't pick Wichita State, and since Louisville won last year, they were the most logical team that most people would pick. And my thesis proved to be correct; many more people picked Louisville in my pool to get to the Final Four than Michigan. So my second big-point scoring opportunity is for Michigan to get to the Final Four instead of Louisville.
So what does all this have to do with invesing? It's all about buying late into a bull market versus buying early in a new bull market. Following the herd or making a contrarian trade.
If you want to bet on a late bull market, then to beat your opponents you have to squeak out the late gains, or in NCAA-pool parlance, you have to win the earlier games in the pool. Take the biotech sector, for instance. These stocks have had massive runs. If you pile in now you have to take gains away from a smaller pool of investors who are piling in later than you. The herd is already in this trade, and the only people who are left to pile in are those who are envious of the ones who got in early when the trade was a contrarian trade.
On the other side is something like gold where everyone is still bearish and throwing in the towel, yet gold is up on the year and outperforming most other asset classes. The big banks are fighting for the crumbs
on the downside; they are predicing $1,100-$1,200 gold like it's the end of the world if gold was to fall down 15% from here. Where were these forecasts
when gold was $1,900?
The big banks are essentially betting on early round picks in the NCAA tournament. They are cute to get right, but they don't score you a lot of points and they aren't going to help you win big at the end. But if gold resumes its secular bull market
and in three to five years is much higher than it is now, the contrarian Final Four pick is long gold.
Related story: Selecting March Madness Brackets: Why Second-Favorite Teams Matter
Editor's Note: This article was originally published on NextBigTrade.com.
No positions in stocks mentioned.