Aaron Craft Offers Investment Advice.

March 25, 2013

You gotta love March Madness. 68 teams begin a two-and-a-half-week, single-elimination tournament. One team runs a six-, maybe seven-game gauntlet and is crowned champion.
Such emotion. The highs and lows leave you exhausted. But, everyone participates. Everyone completes a bracket.
My five year old asked me no less than ten times over the course of the weekend, "How many points do I have now, daddy?" (As of this morning, the answer is two more than his old man.)
Your colleague, the one who assumed a "fast break" refers to someone sprinting to the men's room? He's in the office pool.
Point is, this wonderfully manic sporting event draws everyone in. Even though most realize their teams will not win - though I'm pretty confident about my Hoosiers. Still, even with the inevitable despair that comes with seeing your team eliminated, you still participate. Fill out a bracket. Pay five dollars. Happily tally your points even after your team was knocked out in the first round by The Roughriders of Grand Valley Technical College.
Investing, like watching the NCAA tournament, is an emotional game. Highs and lows. Fear and greed. The NCAA tournament only eliminates your team. The marketplace can eliminate your nest egg.
Like the tournament, investing has its Cinderella stories. Who would have guessed that Florida Gulf Coast University would meet Florida in the Sweet 16? Certainly not The Gators, who declined FGC's offer to scrimmage in the pre-season.
Likewise, who would have known that a sleepy little utility company named Otter Tail Corporation would have paid a four percent dividend over the last year while simultaneously returning a 32 percent capital gain?
Gotta love an underdog.
The stock market, like the NCAA Tournament, is a wondrous thing to behold. Trillions of dollars being efficiently reallocated each and every day at the hands of the world's largest pricing mechanism.
Yet, unlike those office pools, no one wants to participate in the stock market. Even after four years of market growth appreciation, investors remain in cash or bonds.
These last four years have been stellar. Yet, investors were so traumatized by 2008 that many have simply deferred. Hardly blame them. It's difficult to climb back on after that first time the horse throws you. Yet, there remains no better means of saving for one's financial autonomy than the equity markets.
Just because your team shot 23 percent and missed every free throw in this year's first round loss does not preclude you from watching the rest of the tournament?
Likewise, just because the market declines, or a portfolio position reports a terrible quarter, does not mean it's time to tear up your brackets. Not when the S&P 500 has an average annual return of 14.75 percent over the last four years.
A healthy bull market needs to climb the proverbial wall of worry. It never feels right. Disaster looms around every corner. Renowned market technician Walter Deemer said it best: "When the time comes to buy, you won't want to."
Likewise, by the time the market has proven itself, and you finally feel good about getting in, it's too late. Be greedy when others are fearful; fearful when others are greedy.
Look at the University of Kentucky. Last year likely felt like the 1990s bull market. A fabulous season culminated with the Wildcats cutting down the nets. This year? They don't even make the tournament. Then, adding insult to injury, they lose to the Colonials of Robert Morris in the NIT's first round.
Wildcat fans will not be deterred. Next year? All optimism.
When the consequences of not adequately completing your tournament brackets equates to five bucks and a moment's heavy heart, one jumps in. Conversely, when the headlines are pitching doom and gloom, and your retirement appears as if it's in jeopardy, one finds it much more difficult to jump in. Yet, that's precisely the time to do so.
Bank savings accounts are losing to inflation. Meanwhile, a portfolio with 50 percent invested in the S&P 500, 25 percent in the Barclay's Aggregate Bond Index, and 25 percent invested overseas (MSCI EAFE) has averaged 8.29 percent per year over the last decade.
It's not too late. Perhaps we're in this bull market's Elite Eight. Or, maybe it's the second round. Who knows? But, investors mush quash their fears and invest. So long as interest rates remain at historic lows, inflation remains in check and the economy continues to crawl off the mat, these markets will likely seek higher highs.
Bottom line? Sometimes you have to take some calibrated risks. In life. In sports. In the markets. Otherwise, there can be no victory.
Ohio State's Aaron Craft did that yesterday. He'd had a terrible game. Missed layups. Free throws. Yet, with the game on the line, and time running down, Craft showed nerves of steel. He took a risk. It paid off.
Investors would be well served to emulate Craft's hard court heroics. This young man who has worked tirelessly on his game. Who also carries a 3.92 GPA. And who, after having played poorly, steeled his nerves and got back to the fundamentals.
Worked for Craft. It can work for you.

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