What if I told you I had the secret to creating the perfect bracket?
It’s March which means one thing – March Madness – a time of year to expect the unexpected. We saw a few crazy upsets in 2021; what will see this year? 64 teams enter the tournament and by the end of the first weekend only 16 are left standing.
Every year, like ~40 million others, I’ll not only complete a traditional bracket (with the hopes of winning $5 from each of my coworkers), but I’ll also complete a “benchmark bracket” in order to compare my performance to that of an all-favorites (aka “chalk”) bracket where the higher seed team always beats the lower seed team.
Passive vs. Active Approach to Managing Your Brackets
Let’s call all chalk the “passive” approach and choosing upsets the “active” approach to bracket management.
Passive – this method feels “safe and relatively easy.” Using this approach, you select the higher seed for every match-up. After all, higher seeds tend to beat lower seeds.
Active – now this feels “exciting and more like gambling.” In this approach you pick some lower seeds to upset higher seeds. It is going to definitely add an element of risk to your bracket (and provide you with bragging rights among your friends!) However, in order to “outperform” the passive all chalk benchmark, over 50% of your upset picks must be correct.
Before you reach for your bracket to check for how many upsets you selected – let’s go through a quick thought experiment, what if rather than being judged on your 2022 bracket, you were judged on the aggregate success of all of your brackets for the next 30 years – would your approach to bracket management change? The passive all-chalk approach might rarely win your pool, but you’d be much more likely to consistently finish in the top half of competitors – and if you were able to compound this advantage over decades you’d be in great shape.
Is this starting to sound familiar?
Bracket Management and Investing
Naturally, the parallels between bracket management and investing are uncanny:
Results: Just like a more active approach to bracket management typically results in worse overall performance, actively managed investment funds tend to experience the same kind of struggles against their benchmarks. According to SPIVA 60.3% of Large Cap US Equity Funds underperformed the S&P 500 in 2020, a year with so much volatility it should have been ripe for active management! Expand this data set out to 20 years and 94% of Large Cap US Equity Funds have underperformed the S&P 500.
Sex Appeal: Passive investing is not sexy. It means you don’t get to brag about your shares of GameStop going “to the moon” (remember this from 2021?!?) GameStop is now down ~75% from its 52-week high. Similarly, bragging about picking Gonzaga to advance to the Final Four (again) will garner you no accolades, but you might get kudos if you pick 16 seed Norfolk State to upset 1 seed Baylor in the first round of the tourney (now that would be a major bracket buster!) With that said, long term investing is NOT SUPPOSED TO BE SEXY just like 16 seeds are NOT EXPECTED TO MAKE IT PAST THE FIRST ROUND. 16 seeds are 1-143 all-time in the tournament. In other words, selecting Norfolk State to win is a gamble just like GameStop was in 2021.
Costs: Passive investing is low cost and requires little mental effort. Similarly, creating a passive all chalk bracket takes no time at all. Active investing is much more expensive. Likewise, doing expansive research to try to pick NCAA upsets can take hours.
Luck Vs. Skill: If you have a friend who took the risk and predicted Norfolk State AND they do in fact end up beating Baylor, would you trust them to make a bracket for you next year? Does this pick make them an incredibly skilled NCAA bracket manager, or did they just get lucky? In my eyes this pick seems indicative of someone willing to take on huge levels on unnecessary risk, and I’d predict their bracket in subsequent years would struggle because of it. Similarly, there are actively managed funds that have outperformed their passive benchmarks, but is this primarily due to skill, or due to luck? Would you trust their past performance to be indicative of future returns? I wouldn’t.
Evidence Based: My belief in passive investment management stems from my belief in evidence. The numbers speak for themselves. Similarly – since the field expanded to 64 teams in 1985, 1 seeds have won the title 63% of the time, and a 1, 2, or 3 seed has won the title a whopping 89% of the time.
What is the Secret to Creating a Better than Average NCAA Bracket?
In conclusion, while it may be a hated strategy, if you’re looking to consistently finish in the top half of your bracket, chalk is the way to go. With that said, I’m also well aware that if you’re looking to win your bracket (particularly a bracket with many participants), you’re going to have to come up with some wild picks – you’re hoping for huge volatility in your favor. This level of risk taking is valid because a busted bracket has no real-life consequences. A “busted portfolio” on the other hand that takes on unnecessary risk, high costs, and seeks short term volatility to try and hit a home run (I’m looking at you GameStop), is more than likely to struggle in the long term, and certainly does come with real life consequences.
When it comes to investing, trust the evidence, keep it simple, keep it passive – and for what it’s worth, Go Zags!