March Madness Can Be Hazardous to Your Wealth

Written by GSCR Staff   
Tuesday, 18 March 2014 08:30

I am no psychologist but after informal conversations with a group of individual investors over the weekend, I am convinced that basketball’s annual March Madness can be hazardous to your wealth. 

Don’t get me wrong. I love college basketball. I have attended hundreds of basketball games and been to a few NCAA tournaments in the early rounds. Nonetheless, something happens to the psyche of Americans this time of year that is driven in part by the annual basketball free-for-all. People that would not ordinarily wager on sporting events are happy to do so.  The mindset is to root for underdogs and take more risks which can be dangerous and bleed over into how one approaches investing as well.  This is especially the case for investors that play in the emerging growth or small cap stock arena. By their very nature, small caps are underdogs. Basketball aficionados largely root for the underdogs during March Madness.  Unfortunately, some people equate rooting and selecting underdog basketball teams as winners with buying small cap stocks yet do not engage in meaningful due diligence. Such behavior can lead to unnecessary losses.

One related reason why investors may not spend as much time on investment research during this period is that so much time is spent poring over brackets and websites to make one’s winning picks. As a result, workplace productivity declines and less time is spent on current and prospective investments. The workplace productivity losses can actually be pretty alarming. Last year, a survey released by job outplacement firm Challenger, Gray & Christmas found that the men’s college basketball tournament – which lasts three weeks – will cost $134 million in just the first two days (Thursday and Friday) of the tournament alone. An estimated 3 million U.S. employees spends one to three hours at work watching the games, and two-thirds of all workers will follow the tournament at some point during work hours.

Watching game after game can also elicit a “wager mindset” for some investment bankers as well. Perhaps that is why the number of high profile IPO filings is on the rise around this time of year. By filing now, deals can be priced and stocks can begin trading in the next 4-6 weeks. Some investment banks like to take advantage not just of any investment or other euphoria but also attempt to close these deals before the dreaded May 1st date. This way, the deals are not subject to the infamous “sell in May and go away” adage.

Basketball is a great sport and watching the games can be rewarding, especially if your underdogs go far in the tournament. Make sure that the underdogs in your portfolio are just as well-positioned, and that you carefully pre-screen all IPOs, lest you pay for it later.

 

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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