Last Updated Nov 2, 2010 1:05 PM EDT
Warren Buffett and Peter Lynch are popular investing giants to glean tips from, but today I'm pulling some smart portfolio moves from the San Francisco Giants victory over the Texas Rangers in the 106th World Series. Here are some of the most important lessons:
Don't bet it all on the conventional wisdom. Neither the Giants nor the Rangers were pre-season picks to go deep in the playoffs. Way back in April, the odds in Las Vegas for the Giants to win the World Series were 20:1, with the Rangers at 24:1. Among 36 baseball writers and analysts at ESPN who made 2010 predictions at the start of the season, just one managed to pick either the Giants or the Rangers to make the World Series. (Note to writer Jim Caple: now might be a good time to renegotiate your contract.)
The conventional wisdom was on the Yankees (3:1), the Phillies (6:1), and the Red Sox (6:1) to win the Fall Classic this year. So much for the conventional wisdom -- none of these three teams even made it to the World Series.
This has a few takeaways for your investing portfolio. Chief among them is that it's easy to get pulled in by what's popular, but following the herd can backfire. That's why diversification works. And while the Yankees, Phillies, and Bosox indeed had the talent to merit those odds, the baseball experts and bookies could have been suffering from a bad investing habit behavioral economists call "recency" bias. That is, we tend to extrapolate that what we've experienced lately is what is going to keep happening. In other words, the Yankees, Phillies, the Red Sox have all won in the recent past, so they will win again and again. (As a lifelong Mets fan, I fight my recency bias every April.) As an investor you want to check whether your current portfolio mix reflects your core strategy, or if you're basing your investments more on whatever has gone right (or wrong) recently.
Defense wins. The first two Giants wins were in large part a function of Ranger miscues. In Game 1, Vlad Guerrero, having to venture back into right field after DH'ing all season, produced two momentum-shifting bobbles, and the Rangers' four team errors all but sealed the 11-7 defeat. In Game 2 it was the 8th-inning walk-fest courtesy of the Rangers' pitchers that did them in.
So often we think about a "good" investment or portfolio strategy in terms of how much money it might make for us. And upside potential is obviously important, but playing defense matters, too. Two central questions to always be asking yourself are "What if I'm wrong about this?" and "What are the consequences if I am wrong?" The consequences of being wrong about going all-in on one stock or sector are going to be costly, but keeping that bet to a discrete portion of your portfolio reduces the pain if you're wrong. I found it somewhat amazing that after the WorldCom and Enron debacles, BP employees evidently hadn't learned that lesson; about one-third of the company's 401(k) was invested in BP stock at the time the big spill sent the stock plummeting. I'm also in the head-scratching camp over all the money currently parked in Treasury bonds. When rates eventually rise, that's going to be an ugly place to be. So remember to play defense.
Adapt to market conditions with tactical tune-ups. Okay, I am a big believer in buy and hold. But that doesn't mean buy-and-forget. Giants GM Brian Sabean logged his own virtuoso performance this year, making tactical moves throughout the season to upgrade his portfolio. Just two position players in the Giants' starting lineup on Opening Day started in the World Series. The battery of Madison Bumgarner and Buster Posey that produced a 4-0 shutout in Game 4 were still in the minors when the season began. And Cody Ross, who powered the Giants in the first two rounds of the playoffs, was a late-season pickup from the Florida Marlins (side note: Sabean reportedly made that move in part to play defense, as he didn't want the rival Padres to get Ross. Playing defense yet again.)
The investing takeaway is to constantly comb through your portfolio and see if there are any opportunities to upgrade and tweak. Are you still holding onto an under performer waiting for it to rebound to where it was in 2007, rather than replacing it with a better position player? And exactly when was the last time you rebalanced your 401(k) and 529 plan?
Sometimes you just get lucky. As good as the Giants pitching was from day one, the rest of the team wasn't exactly screaming World Series-bound back in the spring. And for all the credit Sabean deserves for his in-season tinkering, and the amazing job manager Bruce Bochy did pulling it all together, on some level luck/good fortune/the baseball gods are a part of the story as well. Hell, the Giants referred to themselves as a bunch of misfits. Not exactly something you'd hear out of the Bronx.
Do talent and skill matter? Of course. But sometimes you're just lucky, too. And next year might be different. Keep that in mind when you're giving yourself too much credit for some financial gain -- it'll remind you to be appropriately humble since the next time, things might not go your way.