Iron Capital Insights

  • Iron Capital Insights
  • April 3, 2014
  • Chuck Osborne

March Madness

It has been a while since we sent out our last Insight, because there really has not been much of note in the investing world. That is not true of world events lately but we are not here to pontificate on everything, only those things that impact your investment portfolios.

Sometimes, however, something happens that may not impact your portfolio but does illustrate a learning moment. The end of the college basketball season can be such a time. For the winning programs this marks the spring ritual of the NCAA Tournament, also known as March Madness. Even people who never watch basketball through the year get excited about filling out their brackets. Our president filled his out on national television. It’s a big deal.

For the other basketball programs it can mark the time of another kind of madness: the search for a new coach, namely one who might get them into the aforementioned tournament. Unfortunately for my fellow Wake Forest Demon Deacons we are in the second type of madness. The search for a new coach has begun and the online commentary from the fan base has begun right along with it. It has struck me that hiring a new coach is much like making an investment. The processes share more than a few similarities: The success or failure of a new coach will be completely determined in the future, yet all one can possibly know about the individual is in the past. One must look at past data and project what the future may hold. The psychological mistakes can largely be the same as well.

Online the avid fans are all demanding a coach who has seen recent success. Winning two games in the NCAA tournament can turn a coach from someone no one has ever heard of into a celebrity and a must-hire. There are currently two coaches being rumored to be front-runners for the job at Wake Forest. One has the kind of background a reasonable person might expect: He played college basketball under a Hall of Fame coach and even won an NCAA championship as a player. He had a successful career in the NBA as a player. He has been an assistant coach at a major college basketball program working under another Hall of Fame coach. He has won an NCAA championship as an assistant coach. He has worked as a head coach in a smaller program and had early success.

The other candidate has little pedigree but did get a job as a head coach at a smaller program. He inherited a very good team from the previous coach who left for a bigger job. That team went to the NCAA tournament and made it all the way to the Final Four. Since then he has not accomplished much; in fact his winning percentage is not as good as the coach from whom he inherited that Final Four team. But, his name is always mentioned when major programs are looking for a coach.

I have no idea which coach would do better, or if the rumors are even true that these are the two finalists for the job. However, the Internet crowd is almost unanimous in their desire for the second option, and I find that both interesting and educational. Making sound investment decisions is about understanding probabilities. No one knows what the future holds; all we can do is use our logic and reason to judge whether success is more probable than failure. However, the madness of crowds gets in our way. What is probable and what is popular are often at odds.

Take the Wake Forest coaching dilemma as an example. The future success of the first candidate – the one who has been there himself as a player, has tutored under two Hall of Fame coaches and has had early success building a program from nothing – is highly probable. I would go so far as to suggest reasonable success is practically guaranteed.

The second candidate – who happened to win four games in a row at the right time once – could possibly be better. Anything is possible. However, I believe most reasonable minds would agree that the likelihood is far less certain. Yet the online crowd says he would be a “home run” and the other guy would be a disappointment.

Benjamin Graham, the father of security analysis, once said, “The investor’s chief problem – and even his worst enemy – is likely to be himself.” Evidently that is true for basketball fans as well.

Warm Regards,

Chuck Osborne, CFA
Managing Director