Can Investors Learn Anything from March Madness?

The 2013 NCAA national semi-final basketball games are set to be played this weekend. The four teams that remain in contention for the national title are Louisville, Michigan, Syracuse and Wichita State. Yes, Wichita State. Not many people thought the Shockers would make it this far. Of the 3 million plus brackets entered into Yahoo! Sports Tournament Challenge only .017% picked Wichita State to win the tournament. 1% selected Syracuse to be champions. 2% thought Michigan would lift the trophy. And 29% believed Louisville would prevail.

Here are some more interesting stats:

–       Only 9 entries picked all 4 final four teams

–       0.3% picked 3 out of the 4

–       9% picked 2 out of the 4

–       58% picked 1 of the 4

Think about that for a minute. Roughly 6 out of 10 entries predicted only one of the final four teams. Which means about 40% of the entries did not correctly pick at least one team in the final four. I’m pretty certain if we polled the entrants before the tournament started, 40% would not have thought they would be shut out. We see this type of data just about every year when the success of individuals trying to predict the outcome of basketball games is evaluated.

In short, it is very hard to do.

Imagine if instead of having to try and pick just four teams, entrants could have selected a group of 25 teams to make the final four. Obviously, their chances of success would increase. That is the essence of passive investing. Instead of trying to pick the four hot stocks of 2013, simply own an index or other passively managed fund so you own both the winners and losers.

To further my point, how many investors out there hold individual shares of PulteGroup Incorporated? PulteGroup (PHM) was the best performing stock in the entire S&P 500 Index for 2012. I don’t remember any analyst or forecaster recommending PHM in 2012. Just as many bracketologists didn’t foresee Wichita State making it to the final four.

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