Finance Roll

Although it may be hard to believe, there is more going on in the world than the NCAA Basketball Tournament. And even though it's not nearly as exciting as an expanded sports page, you will soon receive your March (Investment) Tournament Program... in the form of Brokerage Firm Statements. What is this guy talking about? What correlation could there possibly be between an Annual Round Ball Tournament and an Investment Portfolio or its Management? Let's start with a few simplistic similarities: the total unpredictability of the end result; the interim ups and downs, emotionally and numerically; the media hype and expert commentary; the skill and coaching requirements. And a few of the differences: the long-term impact on people's lives; the possibility that all participants can achieve their goals; the open-ended time frame; the non-competitive nature of the event.

Revered Blue Chips (and Blue Devils) fall from grace on the financial hardwood and unknown Cinderellas gain fame and financial fortune with upset victories in both venues. Short-term interest rate gyrations produce an ebb and flow in fan momentum with each FRB meeting, and the betting changes, and changes again, looking for the winning team! BUT, if the legendary Greek was handicapping portfolio management teams, he would be smiling broadly and rubbing his hands together in anticipation of making odds in the Financial Markets! How cool is this, a game with no end. And as every gambler knows, the longer the play, the more likely it is that the "house" will win. In basketball and in finance, the road to the final four is built on four principles: the Quality of the team members (the portfolio), the Diversity of their offensive and defensive skills (Diversification reduces risk of loss), the generation of enough Income (points scored) to exceed projected expenses (points allowed), and Coaching, or the decision making capabilities of team Management.

If you recognize the importance of the Financial Final Four, you can insure that your investing experience will be a winning one. It's certainly easier than getting a team of athletes to the Big Dance. The recruitment of high quality players is the first step, and the similarities between identifying fundamentally sound companies and fundamentally adept players are fairly obvious. Players, who can't dribble with both hands, understand a pick and roll and hit the open man just aren't considered. Similarly, some securities score big while others mostly assist. But successful coaches don't gamble with unproven walk-ons too frequently.

The team needs diversity... quick and unselfish guards for ball control and play calling; tall and athletic forwards for scoring and rebounding; and a big man for intimidation and shot-blocking, if nothing else. Investment portfolios need an Asset Allocation plan that balances the Working Capital between growth and income securities... helping to keep the game plan intact, and the manager's focus on the teamwork needed for goal achievement. Team depth is essential.

The Final Four is comprised of the best teams, not necessarily the best players. The most successful teams will have the right combination of offense and defense to get the job done. You can't win without scoring, but you have to be proactive in limiting the other guys point production as well. If all of your starters contribute some points, and you have the depth to offset a surprise injury or foul trouble, your chances of success are heightened. It should come as no surprise then, that an investment portfolio with no income just isn't going to get the job done. And only with programmed income plus an occasional "three pointer" will the portfolio out shoot team inflation consistently.

It's not uncommon for the winning team to lack a superstar... we've all seen how easy it is for a well-coached team of not-quite-as-skilled internationals to upset second-generation prima donna Dream Teams. Sure, money, organizational size, and program reputation build the most successful college sports programs but the teams that make it to the Big Dance perennially have two things in common... coaching and recruiting. Freshmen with superior fundamentals must be selected to replace graduating upperclassmen... and the beat goes on.

Every successful team needs a decision-maker, someone who designs the game plan best suited to the skills of the players and the uncertainties of the opposition, one game at a time, but with an eye on the future... the final goal. Do we full court press, play man-to-man or zone, fast break, etc? There can only be one decision maker, and experience matters... big time! Investment portfolio management is no less of a decision makers' game. To make the right decisions, you need to know your players abilities and weaknesses, you have to develop the right combination to attain the goals you've identified, and you have be in there all the time making the decisions needed to keep your team at the top of its game. Best performers must be allowed to "graduate". Undervalued "freshmen" must be found. Patience is needed to see things through, etc.

But the investment game plays out over years instead of minutes and with a plan that needs to be adjusted knowledgeably, but infrequently (if it is being done properly). Understand the Financial Final Four, and you'll be in top hat 'n tails at your own Big Dance.