Market insights and analysis

By David Wismer

A few weeks ago, I wrote about the broad attributes from sports that apply to investing principles. With the beginning of a new football season, I want to focus more specifically on what investors can learn from that sport.

We witnessed one lesson from last year’s Super Bowl: The trend works—until it doesn’t.

The Kansas City Chiefs entered the game on a quest to become the first NFL team to achieve a consecutive-season three-peat as champions. While KC was not a heavy favorite, quarterback Patrick Mahomes’ track record of excelling in the biggest of games had most fans thinking he could do it again. He was far and away the pregame odds favorite for Super Bowl MVP.

It was not to be, and his—and the Chiefs’—winning trend was broken in spectacular fashion.

ESPN noted after the game, “The Philadelphia Eagles tormented Mahomes throughout the game en route to a 40-22 victory, and they got to him early and often. Eagles QB Jalen Hurts won MVP.”

ESPN also reported:

•  “The Chiefs had 14 yards on their first five drives, the fewest yards they’ve had on their first five drives of any game started by Mahomes, playoffs or regular season. …

•  “The Chiefs’ stretch of nine possessions without scoring was their longest with Mahomes starting, regular season or playoffs.

•  “Mahomes was sacked six times, the most he has taken in any game of his career (regular season or playoffs).”

You get the point.

Flash forward to the new NFL season. We have already seen odds-defying instances in a couple of games:

•  In the NFL’s Thursday night season opener, the Dallas Cowboys and the Eagles played an exciting first half, with the Eagles leading 21-20. Fans on both sides expected further offensive fireworks, but only three points were scored between the two teams in the second half. The Cowboys lost 20-24—a tough blow for Dallas fans but especially painful for bettors who took “the over,” set at 47.5 points.

•  On Sunday night, the Baltimore Ravens held a dominating 15-point lead over the Buffalo Bills late in the fourth quarter. ESPN Analytics calculated that the Ravens’ win probability was over 99%, and another source noted, “Since 2000, teams were just 3-2,315 when trailing by 15 or more points in the final four minutes.” Of course, the Ravens improbably lost, 40-41, on Buffalo’s amazing comeback and a field goal in the final seconds.

It reminds me of an important investing principle often discussed in this space: Risk is always with us.

“Defense wins football games”—and other investment analogies

In interviewing financial advisers for Proactive Advisor Magazine, I have heard more than once, “Winning football starts with a strong defense, as does investing.”

Mike Posey of Theta Research, who played high school football in Texas, took the football analogy a bit further in an article we published called “Agility drills for client investment portfolios.”

As a former player myself, I got a big kick out of it.

Mike likens some aspects of football to several elements of sophisticated active investment management, citing some of the principles he believes are important to financial advisers and their clients, paraphrased here:

1. Diversify. Just as it wouldn’t make much sense to field a team with players who all have the same skill sets or who all play the same position, an agile investment portfolio should also be diversified to include noncorrelated strategies, each with different strengths in the portfolio. Whether you call these strategies active, tactical, or alternative, they are characterized by rules-based approaches that seek to follow market trends rather than being victimized by them.
2. Know the playbook. Advisers should explain to clients why each investment strategy is included in an investment portfolio and what it is intended to do. In football, sometimes an aggressive passing style is called for on offense; at other times, a tightly controlled and conservative game plan is needed. Similarly, it’s equally important to make sure that multiple investment strategies—not just multiple asset classes—are represented in clients’ allocations. To be effective, the overall plan for a portfolio should be like a playbook, with different strategies designed to perform during a variety of market conditions across long time frames.
3. Watch the films. After Friday night high school games, Saturday mornings are dedicated to reviewing the game films. Similarly, advisers should regularly monitor their clients’ portfolios. This is not to say that anyone—client or adviser—should be overly concerned with scrutinizing performance every day or every week. Instead, advisers should review their clients’ portfolios as frequently as quarterly and no less than annually. Such a review can help to determine whether the portfolio’s constituents are performing as expected and whether the risk level is appropriate. (Using Flexible Plan Investments’ proprietary business analyzer tool, advisers—and, through them, their clients—can view the suitability, durability, diversification, and multiple benchmarks customized for each client’s actual portfolio. It is especially helpful for monthly, quarterly, or annual reviews of an adviser’s entire book of business. Advisers can access the tool on the adviser dashboard of flexibleplan.com after login.)
4. Keep fantasy football in its place. Finally, beware of the investment equivalent of fantasy football. Backtesting can be a valid and productive analytical tool when used properly, and a dangerous tool when used improperly. Investment advisers must take on the coaching role, ensuring that trading strategies are appropriately evaluated and that backtesting methodologies are sound. (For more on this, see an article by FPI’s founder and president, Jerry Wagner, explaining FPI’s walk-forward backtesting approach, an advanced method for testing trading strategies.)

Mike summed it up well:

“Failure to include agile investment strategies can be costly. In football, the lack of agility can result in an opposing team’s score, or your own team’s fumble or tackle for a loss. For an investment portfolio, the lack of ability to adapt to market conditions can result in huge losses. …

“After 30-plus years in the investment industry, and having lived through markets of all types, I have come to some firm convictions. By including actively managed strategies in your clients’ portfolios, they will have a better chance, I believe, of being on the winning team and reaching their investment goals.”

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If you are a fan, I hope you enjoy this year’s football season, whether you root for a high school, college, or professional team!