As someone who grew up in the New York area I’ve savoured the Knicks season which ultimately ended with a championship on Sunday.
Over the past several weeks the Knicks have brought a good deal of joy to my life.
I’ve reconnected with mates from high school who I don’t talk to often enough.
I’ve experienced the gambit of emotions that comes from watching a series of closely fought games.
I even hugged a random man in the Sportsmen Bar in Bangkok at 10am after the Knicks epic game four comeback.
Reflecting on the Knicks’ run I’ve come up with three lessons for investors. Is this a stretch? Perhaps. But indulge me this one last editor’s note.
Be wary of the shiny objects
The NBA finals was a David vs Goliath match-up.
Playing the role of Goliath was Victor Wembanyama of the San Antonio Spurs – Wemby for short.
He is everything you want in a basketball player. His physical gifts are obvious given his height and his ability to do things that somebody with his size shouldn’t be able to do.
Despite only being 22 years old, Wemby has already been anointed as the new face of the NBA. Wemby carefully crafted his image which has worked surprisingly well in a cynical age.
Wemby was widely praised for training with Shaolin monks in China to improve his balance. He was declared an intellectual because he reads and plays chess. The media deemed him a deep thinker when he sat in the park sketching some tree. To me this all seemed a tad performative...but everyone swooned anyway.
The mantle of Goliath’s diminutive foe was taken by Jalen Brunson.
On paper Jalen is everything you don’t want in a basketball player. He is slow and short – at least for the NBA. When he joined the Knicks the commentators universally criticized the move as Brunson was “not a saviour in any way, shape or form.”
Nobody gave David or Brunson a chance.
Yet David confidently told Goliath before battle, "This day the Lord will deliver you into my hands..."
And when faced with his own giant, Brunson told the world he wouldn't be backing down either, “Some guys are always gifted: Amazing length, amazing athleticism. But just put me in front of that guy. That's my mindset. I'm gonna battle.”
It is human nature to reflexively find some things more compelling than others. In the NBA a 7-foot, 4-inch player with a compelling – if slightly nauseating – narrative is always going to be more intriguing than a 6-foot player who is reserved and rarely speaks.
Investors are naturally drawn to certain things and this can have consequences as high valuations often lead to lower returns. Jeremy Grantham summed it up well in his book The Making of Permabear (I read books just like Wemby!) saying,
“Historically, equity investors have overpaid for excitement and sex-appeal: growth, profitability, management skills, technological change and, most of all, acceleration in the above.”
Savy investors understand this tendency and view markets in a more nuanced and holistic manner. There is plenty of data to back up the benefits of this approach.
Professor Robert Haugen dedicated his academic career to showing that boring shares – those with low volatility – did better over the long-term than the exciting shares investors are drawn to.
In his 2012 paper titled Low Risk Stocks Outperform within All Observable Markets of the World he showed that in 21 developed and 12 emerging markets the shares in the lowest decile of volatility outperformed the highest volatility decile in almost every instance. Read more on his work here.
Professor Jeremy Siegel explored returns across the 20th century and discovered the best performing US share was cigarette company Philip Morris. Why? High dividends reinvested at reasonable valuations.
During a century of innovation none of the companies that invented or commercialized the airplane, medical breakthroughs, the computer or the internet led the list – it wasn’t the shiny things that led to the best investor outcomes.
It is easy to be seduced by potential. But a good outcome requires more than the glimmer of promise. It means paying a reasonable price for growth and finding companies with moats to minimise the impact of ruinous competition. These intangibles get lost in the hype over the next great investment.
There was never any hype over Jalen Brunson. Yet he won a state championship in high school and a national championship in university. Now the NBA. He has the intangibles that aren’t readily apparent to everyone.
For Wemby talent alone wasn’t enough as he missed key shots and turned the ball over at the end of the game. He needs more seasoning, maturity and experience – and maybe this will make him into the champion he was prematurely declared.
Don’t lose sight of the definition of success
In a bizarre and childish press conference after the final game Wemby talked about how the Spurs dominated a series where they won one out of five games.
Most of the games followed a familiar pattern. The Spurs would build a big lead and ‘dominate’ the first quarter. Then the Knicks would come back to win as the Spurs made mistakes and a visibly fatigued Wemby became a bystander.
All that matters in basketball and investing is the end result. As Nassim Taleb said “It doesn’t matter how frequently you succeed if failure takes it all away.”
Like Wemby, investors often can’t see the forest for the trees. Executing a plan to achieve a long-term goal is far less exciting than finding the next 10-bagger. Most investors focus on the latter and forget about the former.
The key drivers of success – asset allocation, minimizing taxes and fees, risk management – are ignored in the quest to ‘dominate’ with the highest returns possible. This pursuit often causes investors to sabotage their long-term returns.
Remember your strategy when things seem too easy
In the beginning of game four the Spurs couldn’t miss while building a 29-point lead. I handled this disturbing turn of events with my customary grace by rapidly consuming Changs.
In the second half the Spurs started to miss a few shots and the Knicks inched closer. There were several things the Spurs could have done - take more time off the clock or perhaps throw the ball inside to the guy the Shaolin Monks had to push three cots together to accommodate.
The Spurs did none of those things. Instead, they shot eight straight three pointers as quickly as they could each time they had the ball. This series of poor tactical decisions contributed to the Knicks’ eventual comeback.
When times are good it is easy to deviate from a plan. The Spurs didn’t’ think they needed to stick to a strategy when all their shots were going in. Investors don’t think they need a strategy when everything goes up.
Standards and discipline get thrown out the window in bull markets. If you are a value investor and the SpaceX IPO is starting to look good it might be a sign you are falling into this trap.
This hubris will catch-up with investors in the next bear market. To paraphrase Hemmingway, this reckoning will occur gradually… and then rapidly.
A strategy doesn’t have to be complicated and Buffett came up with one almost anyone can use:
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”
Final thoughts
As the buzzer sounded in the last game Wemby stormed off the court without bothering to shake the hands of his opponents. He ended his press conference by telling the assembled reporters, ‘see y’all, never’.
But the first Frenchman to ever say ‘y’all’ will be back – likely with an entertaining story about an obscure training regime.
Perhaps it will be the Bushmen of the Kalahari or a sherpa in the foothills of the Himalayas that will help Wemby to – literally and figuratively – elbow his way to his first championship at all levels of basketball.
Jalen Brunson will be in the gym. He will be practicing the hypnotic array of crossovers and head fakes that allow him to weave through tree trunks of men for a critical crunch time layup.
Investors will continue be tempted by the next can’t miss investment by proselytizing charlatans in well-appointed suits.
Resist the siren song of get rich schemes and instead focus on the un-sexy work of building wealth to create a better life for yourself and those you love. Leave the hype and flash to others and build a life worth living.
Mark LaMonica
Also in this week's edition...
The ASX's largest stocks are leaving much of the market behind. Tim Carleton from Auscap shares his thoughts on why high quality businesses are on sale.
Owen A. Lamont from Acadian examines something new and unusual in markets: high value-weighed dispersion.
Wealth concentration is at an all time high. Michael Collins looks at why inequality may be a broader threat to economic stability.
AI hype is sweeping global markets, however, Roger Montgomery thinks its four horsemen could bring a reckoning.
Jason Nassios and Beth Webster share why the budget tax reforms barely scratch the surface and explore what Australia needs next.
Trevor Schmid discusses why negative gearing did not die on Budget night.
Hayden Green explores how family offices have quietly taken over Australia's private capital.
This week's white paper from GSFM affiliate, Man Group, looks at the growing divide AI is creating across the technology sector.
Curated by Simonelle Mody and Leisa Bell
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