Since yesterday was a Saturday, my day was spent watching college football, of course. My alma mater, Michigan Wolverines, are playing well but by no means does it mean we are going to win the Big Ten…and making it into the college playoffs would be quite an achievement with first year head coach Jim Harbaugh, but I digress.
One of the interesting things I heard from one of the commentators was that we can’t reward teams with higher rankings merely because they have the POTENTIAL for winning out the rest of the season or doing well. They were very specific to say “you can’t reward potential.” I obviously agree, but I also laughed…why can’t we do that in college football? Isn’t that what 99.99% of investors do with their own money?
I am a value investor. I pay for what people ignore and think isn’t there. I like to find value in things people have determined to be worth a lot less. I also consistently argue about companies being bid up in price merely because of their potential: i.e. Amazon. If I had $1 for every time I heard someone say “It’s ok for Amazon to go up. They have SO much potential. They will be worth it.” In past articles I have said “FINE! Yes, they COULD be worth it someday…wait until they get there THEN reward them with that value. Don’t pay today for what they have yet to accomplish no matter how obvious it may appear to be!”
Something so simple as college football can teach us these lessons. We don’t hand out championships in week 1, and in fact, rarely are the #1 teams at the beginning of the season the team that actually wins the title. The same is true with investing, yet people always fight history and the facts. Rarely are the high flying “growth” stocks the ones that outperform, yet we consistently give them more value. Why is it any different?
It’s hard to ignore stocks that continually go up but if you go look at Yahoo Finance articles just from July, you never saw anything about this market going down and in August, you saw it fall 12.5%. Clearly the party goes…until it stops. Don’t be the one that bet on the growth and then get punished and not be able to sell before the end stops. You think you will, but you won’t. It doesn’t happen.
Not only is college football a wonderful thing to watch, we can learn a bit from it too.