A passion around here is football. We love talking about the Cleveland Browns, the NFL, and the analytics teams use to make better informed decisions.
Any Browns fans knows how much losses hurt, we felt plenty of pain the last few years. While commentators often refer to teams that ‘find a way to win,’ the Browns always hit a new low in the level of losing. The 2018 season was such a revelation, what a better feeling!
In the latest news, we love the Freddie Kitchens hire. He upended much of the conventional football wisdom, that offenses need to establish the run to succeed. Kitchens reversed this, calling aggressive passing plays to eventually set up game breaking runs. The FiveThirtyEight website just wrote a great data driven piece on this, You Called a Run on First Down. You’re Already Screwed. Also, having some guy named Baker Mayfield execute these plays with pinpoint accuracy helped a little bit too.
The Kitchens head coaching hire was important. If Freddie was just the Offensive Coordinator next year and repeated the success of the past 8 games for the Browns offense, he would likely have been offered a head coaching job next year. The loss of a successful coach would have hurt quite a bit, no matter who might have replaced him.
If you have ever been to the Aurum offices or talked to one of our advisors, you will know behavioral finance is a passion. The intersection of psychology, money, and investment decision making is so not only interesting, but also vital to long-term financial plans.
The chart below shows the behavior gap of returns in different asset classes and actual investor returns. While the S&P 500 Index returned 8.19% the last 20 years, investors earned 4.67% in equity funds (highlighted in yellow).
Our main objective is helping clients achieve their definition of financial success, and a major part of this is closing the behavior gap.
From a pain and pleasure standpoint, behavioral finance has taught us that while gains feel good, the same amount in losses hurts twice as much! In our brains, the same receptors that feel physical pain respond in the same way when we see temporary financial losses.
The behavior gap was on display in December when stocks were falling sharply. Because of the pain of loss, investors sold stock funds at the greatest rate ever (some hedge funds and investors may have been forced sellers due to margin loans being called). According to Ned Davis Research, equity mutual funds and exchange traded funds had redemptions of $94 billion. This was clearly not a part of a long-term investment plan but a reaction to the market volatility.
Like many other professional sports franchises, the Browns took a long view to rebuilding. This included acquiring player contracts at favorable terms, building strength across the lineup, trusting the process, and patience (a lot of patience).
Similarly, investment strategies succeed over the long-term due to acquiring assets at favorable values, diversifying, sticking to a process, and patience.
Behavioral finance applies to sports just as much as investing. We cannot wait until next season.
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