Last week, I was in Seattle for an event sponsored by the CFA Institute. The trip was booked long before any of us knew the Seahawks were going to defend their championship title in Super Bowl XLIX. Following the Seahawks’ amazing comeback in the NFC Championship versus the Green Bay Packers on Jan. 18, the city was electric.
Given that, I rethought the presentation I was planning to make. Originally, it was named, “Valuation, Volatility and Behavioral Factors,” but during that weekend, I retitled it: “Play Football Like the Seahawks, But Invest Like the Packers.”
The thesis was that Green Bay had a methodical statistical approach. It is a team of grinders, marching down field with two- and three-yard runs. They protect the ball, try to avoid turnovers. No razzle-dazzle, just fundamental football, blocking and tackling. In investing terms, they made high-probability trades, slowly accumulating gains, with de minimisrisk of loss.
Seattle on the other hand, looked like the Harlem Globetrotters of football. Plenty of misdirection, and lots of trick plays: A touchdown on a fake field goal (credit holder Jon Ryan’s 19-yard pass to tackle Garry Gilliam). An onside-kick recovery that was bobbled by Packers tight end Brandon Bostick bounced into the hands of Seattle’s Chris Matthews (a former Foot Locker employee) at midfield. After a Marshawn Lynch 24-yard run for a touchdown, Seattle made a two-point conversion.
Finally, a 48-yard Hail Mary pass from Russell Wilson to Luke Willson gave Seattle the lead. A Green Bay field goal sent the game into overtime. In OT, Seattle used just six plays to march 87 yards downfield. A 35-yard Wilson to Jermaine Kearse pass – yet another Hail Mary pass – won the game.
Lots of low-probability plays that all came up roses for the defending champs allowed them a trip back to the Super Bowl.
And therein lay the problem. You can sometimes be too clever, try too hard to pull a rabbit out of the hat.
They got lucky in the Super Bowl, too. Up by 10 at the start of the fourth-quarter, Seattle found itself trailing New England 28-24 with 1 minute 14 seconds left. Wilson threw one more Hail Mary pass that was deflected by New England’s Malcolm Butler, the defending cornerback. But the ball landed on the chest of the prone Jermaine Kearse, the Seattle receiver with the spectacular hands. The ball bounced off his body, he bobbled it, then secured the ball, before it ever touched the ground … all while lying flat on his back at about the Patriots’ six-yard line.
It may have been the luckiest combination of skill and fortune ever seen in the waning minutes of a Super Bowl. And then it all fell apart.
The Seahawks running back is Marshawn Lynch. He has proven all season that he is unstoppable, with more yards rushing and more touchdowns than anyone this year. Holding him “only” to a few yards is considered a success. He had three chances to drive the ball 3 feet into the end zone for the winning touchdown.
Instead, the call on second down was for a pass to a receiver running a slant route at the goal line. A risky call – and a big payoff if it works. New England intercepted. Game over.
There’s a lesson here for investors. In a game of probabilities, you must always be aware of mean reversion. Sure, sometimes trick plays work. On occasion, you can get away with a low-probability surprise if the defense is asleep. But you must realize that eventually you lose.
Just because something is working doesn’t mean you push it. The low-probability trades are just that – the odds are against them working long term. More often, the high-probability outcome is what happens. That’s why we call it high probability.
You can’t load up on leverage and expect to always win. You shouldn’t fill your portfolios with junk just because the returns are great at the moment. Trading on whispers, buying penny stocks, catching the falling knife are all low-probability trades. The likely outcomes of these are losing money.
Consider this: Seattle coach Pete Carroll is one of the best in the business. As head coach at the University of Southern California, he had a winning record of 97-19 (84 percent), and 34-game winning streak (2003-04). ESPN named USC the team of the decade.
In other words, he is one of the very best tacticians ever. If Carroll and the defending champion Seahawks lost the Super Bowl making a low-probability bet, what are your odds?
Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.