Bubbles

Predicting sports outcomes and the weather have many similarities.  Both have lots and lots of previous data; both are frequently wrong; are they both craft?

Predicting sports outcomes, or more plainly, investing in sports, is a craft.  

Wikipedia describes craft as meaning "A craft is a skill, especially involving practical arts. It may refer to a trade or particular art".  Craft shall be the focus of my further studies.  Essentially, what I am doing is trying to create a craft.

Knowledge of the history of the craft is important.  To know whats going to happen, it really helps to know what has happened before.  Because of the amnesia of crowds, one can outwit a crowd by knowing history well and being able to converse about the many aspects of history.

The Black Swan taught me that not only is it important to know history; it is important to know past events as they occured to people during that time.  What people of any given time expected to happen, what actually happened, and how they reacted to what happened.  

This distinction is what makes sports investing a craft.

I also read in the papers about the stock market crash a report on the stock of the company which makes "Crocs".  Its stocks were selling at as high as seventy two dollars a share.  Apparently they continued to expand their production facilities by taking on loans.  

Predictably, crocs aren't that cool and the market is super-saturated.  Nobody wants to buy more pairs and their stock has plummeted to two dollars a share.  

That bubble has burst.

So maybe this new niche I am investigating of "bubbles" emerging in sports betting behavior is related closely to the concept of "bubbles" and mania in general.  

Essentially, find something trendy and bet on its bubble to burst.  Not all stocks go up; but every stock will go down.  The reason the dow jones goes up is because it constantly drops stocks that suck and includes stocks that are "on the rise".  So the DJIA increases while individual stocks drop.  

It seems the best strategy is to sell high first; then buy low.  

I don't know when Crocs will go out of fashion.  But I only had to take one look at them to know they were gay and I would never wear one.  I also knew they were a fad.  They aren't the a new mainstay of footwear where EVERYONE has at least one pair and goes through them quickly, requiring the purchase of more pairs.  

I was taking the red-eye flight from West Coast to East Coast and it really hit me hard.  Investing in a company that I knew nothing about and hoping it would go up was foolish.  But selling the stocks of companies that I know will crash is not.  Bubbles constantly emerge as fads spread and experience enormous growth before burning out shortly thereafter. 

 The list goes on and on:  hush puppies, beanie babies, magic cards, baseball cards, crocs, just to name a few.  And it stretches back throughout history.  I know because I've read books about it.  The Dutch tulip mania, the South Sea company, etc., etc., etc.  This is a repeatable event.  

I get so pumped up thinking about this new investment strategy.  I want to FIND bubbles and take advantage of them.    Bet against them and just hold until it drops.  Every bubble, by definition, must burst.  A bubble is an overinflation and over-evaluation.  It will be corrected sooner or later, and when it happens it happens fast.  

This seems to me like a great idea.  It takes balls to do it.  To sell all my stocks and start investing the money on my own, selling the stocks of companies that are rocketing to the sky, betting on fads to flop, of companies and fortunes to crash and burn.  

If you want what everyone else has, just do what everyone else is doing.  

Is that all I want?  

Further Advice from Warren Buffet

I've spent the last thirty minutes reading articles about Warren Buffet, his investment philosophy, and some quotes from him.

This includes reading his Wikipedia page, and various articles about the man.  

To summarize he believes the main skills in picking a stock correctly are correctly valuing the company (either above or below current appraisals) and being detached from the opinions of others, which will influence your thinking.  

The following six paragraphs are all from the article cited above:

"[It] comes about from having an investment philosophy grounded in the idea that a stock is a piece of a business. If you look at it that way, there's no reason to get excited whether some analyst is recommending it or the company is splitting the shares two-for-one, or whatever. The only way to drive the extraneous thoughts out of your mind is to have a philosophy. And for us that philosophy comes from Benjamin Graham and The Intelligent Investor, especially chapters 8 and 20. It's not very complicated stuff."

"It doesn't make any difference what other people think of a stock. What matters is whether you know enough to evaluate the business," he opined.

You should be able to write down on a yellow sheet of paper, 'I'm buying General Motors at $22, and GM has [566] million shares for a total market value of $13 billion, and GM is worth a lot more than $13 billion because _______________." And if you can't finish that sentence, then you don't buy the stock.

The key is not to be seduced by crazy ideas, but instead just stick to the fundamentals year after year. Academia doesn't get too interested in us -- we're too simple. What would the professors do? A great many of the formulas [they use to analyze securities and markets] are dead wrong. They exist purely to give the intellectual class something to do. We don't do anything just exercise our intellectual proclivity for mathematical formulas.

Instead, if you are a true investor, you should shop for stocks the same way you shop for anything else: Look for sale prices, and never regard falling prices as inherently bad news. Instead, falling prices create the opportunity to buy even more of something that was already worth owning.

In that single sentence Buffett captured the difference between investing and speculating: An investor, like Buffett, wants the price of a stock to fall below the value of its underlying business so he can buy even more and hold for as long as possible.

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So to summarize, one wants teams to perform poorly, to have their "stock drop" below their true levels. 

Smart man, a lot to learn from him.

What Can I Learn From Warren Buffet?

What can I learn from Warren Buffet?  Warren Buffet has been the world's most successful investor of the last half century.  But rather than simply list his biography, which can be found here, I want to focus on which of his teachings can be transferred to sports analysis.  

1)  Are the fundamentals of the company strong?

Warren Buffet emphasizes buying the stocks of companies that have had a run of bad luck but for whom the fundamentals are still strong.  They have assets, a market, and advantages, etc.  He tries to buy companies that have value but are struggling to work in the market.  

The transfer to sports analysis is to find teams that have good players, a good coach, a good system, but for whatever reason they have been playing poorly.  Maybe they have not had the energy.  Or they have had some bad bounces.  They've been the victim of the other teams extraordinary plays or catches.  

2)  Understand what you are investing in.

Warren Buffet only invests in companies, markets, and geographical regions that he understands.  He doesn't invest in things that confuse him.

The transfer here is that one should never invest in teams that one has not followed.  Foreign teams with their own struggles, competing interests, goals and expectations are difficult to gauge, track, and predict.  

3) Make accurate comparisons.

The transfer here is to compare the units of teams accurately.  In basketball, compare each team's players at each position and determine who has the "3 out of 5" advantage.  Then also check the coach's time management skills, and various bench players, whose sum is maybe only equal to one or two starting player's value.  

4)  Be a historian of the market.

Warren Buffet knows more about the future of the market because he knows so much about the past of the market.  He is a prolific reader.  He listens first, talks second.

The transfer here is to not only watch sports unfold, but go back and re-read sports analysis, observe team's seasons in the totality, with the knowledge of what happened but re-living the feelings of the moment.