What data-driven football can teach us about a successful investment

“Hell yeah! That was Lamar Jackson’s response when coach John Harbaugh asked him, “Do you want to go? In fourth in the dying seconds of their most recent clash with the Kansas City Chiefs, led by consensus best quarterback Patrick Mahomes. But despite the question, the action plan was never in doubt. The Ravens were going for fourth and one because they are one of the many teams applying a more analytical approach to the sport of football.

I know, I know … as soon as you start reading this you’re going to speculate that I’m just using this post as an excuse to extend the post-game celebration after the Ravens weathered a host of headwinds at improbably beat the anointed chiefs of Kansas City. You will think this is an opportunistic justification to boast in the underdog justification, rubbing the noses of Lamar Jackson’s enemies in a bunch of Bermuda grass at the M&T Bank stadium that LJ threw, as he realized victory with a huge fourth surge in the closing seconds of the game.

But it’s not just me, a rabid Raven fan, talking about it; and it’s not just football we’re talking about. Instead, we’re talking math and probability, and as a result, the topic is brought up in unfamiliar lanes of the Monday morning quarterback. This is the type of logic that is used to invest even more than football. So let’s take a look at the unique analysis that played such a big part in this game, and then I’ll come up with the most important analysis to tackle in pursuing a good investment.

Fourth-and-one

Conventional wisdom in the National Football League suggests that once you hit the fourth down, if you are not within shooting range you should kick the ball towards the opponent, because if you attempt it on the fourth down and if you don’t get that, it’s that much easier for the opposition to score itself.

But the Ravens are one of many teams no longer succumbing to convention or even just educated instinct. They use cold, hard probabilities to make these decisions. According to Next Generation Statistics, Ravens “had a 75% chance of converting on the 4the-and-1 accountant Lamar Jackson at QB.

If they converted, their probability of winning would be 99%. If they failed, their chances of winning dropped to 33%. But if they did a punt, return the ball to Patrick Mahomes? The odds of winning would have been only 58% (and believe me, it seemed much lower at this point in the game). Plug it all into the NGS calculator, and this is what you get for the “expected probability of winning”:

Go for it: 82.4%

Flat: 57.6%

Go ahead, they did. And win, they gloriously did.

Analytical investment

There are many analyzes we can consider regarding investing, often referred to as quantitative, premium, factor, or factor-based investing. Hordes were identified, and a much smaller number were considered persistent enough to merit our attention, such as beta, small, value, profitability, and momentum. But there is one that sits above the rest – and that is the choice to do nothing at all, to stay in the market even when times are tough, instead of trying to get in and out. exit the market at the appropriate time.

Below you’ll see a chart that shows the hypothetical growth of the market, as tracked by the S&P 500, over the past 30 years (and don’t miss the exciting warning *):

To put them in percentage terms, simply investing in the market for the past 30 years has hypothetically yielded an investor an annualized compound return of 10.23%. Not too bad. Missing the single best performing day, the yield drops to 9.84% per annum. That’s 8.60% if you missed the best five days, 6.52% if you missed the best 15 days, and your annualized rate of return drops to 4.88% if you missed (only) the 25 best trading days in the last 30 years! (One month, US Treasuries gave you 2.64%.)

What’s the lesson here? There are many ways to calibrate and improve an investment portfolio. (Here are a few.) But significant as they are, these are marginal improvements over the simple (but not easy) discipline of sticking to your strategy in tough times.

Of course, this assumes that you have an articulate and coherent strategy, and not a set of diverse and diverse investments and strategies that tend to add up over the course of a lifetime.

What’s the other lesson? Go on the fourth and one.

If you have Lamar Jackson.

And you would give it to Patrick Mahomes.

It doesn’t always work (and there’s no guarantee the market will either), but it puts the odds in your favor.

Premium:

So why did Harbaugh ask Jackson if he wanted to go, even though he knew that was the decision he and the offensive coordinator had already made, based on probability? Because, as Daniel Pink taught us in the excellent book, Drive, autonomy is a powerful motivator.

While the Ravens may rely on cold stats to make some decisions, Jackson plays with contagious glee, so by involving him in the decision he enlisted him and gave him confidence – an effervescence that Jackson then has. reach in the group and spread to 10 other players. This decision alone was to further increase the likelihood of a positive result. At the very least, it’s just fun and makes a great story.

Likewise, as financial advisers, we should never be demanding of our clients. We can educate, encourage and coach, but ultimately the decision – and ultimately the outcome – has to be theirs, as they are more likely to stick to the decisions they have made than ours.




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