Watching NFL football was never the same after one particular season in which my wife Maureen won the annual competition based on the friendly weekly competition to pick which football team would beat the other team by the published Las Vegas point spread.
You can see these point spreads every day in the sports section. Ideally, the point spread is supposed to take into account which team is better and other information such as where the game is being played and injuries to key players.
The point spread is suppose to make the game even between those who know about NFL football and those who do not. So if the New York Jets are favored by 6 ½ points over the New England Patriots (I know…. it’s just an example), then if you choose the Jets to win, they have to win by at least seven points for you to be considered the winner of the bet.
After Maureen had won the year-long competition choosing which NFL team would win week by week, Maureen determined that she had an ability due to her reading of the weekly injury report as well as the weather forecast where the game is being played. She thought that she would be a sure winner for seasons to come. Oh if it was so easy! After that year, she returned like the rest of us to a 50% accuracy on her predictions.
I remembered this NFL Season when I heard that a former bank analyst named Meredith Whitney had recently closed down her hedge fund. Meredith Whitney gained fame for warning (before the financial crisis in 2008) that Citigroup Inc. would cut its dividend. After the distress that Citigroup endured, the company did cut its dividend, and she became a Wall Street star which put her on the cover of many magazines. All agreed that she must have the unique ability to forecast what others are unable to forecast.
But did she have a gift and ability to be able to determine the mispriced stocks that were not reflected in the current prices of the various stocks? Some investors thought she did, allowing her to launch her firm – Kenbelle Capital and its American Revival Fund. The firm was going to invest in heartland stocks after she predicted on TV (and in her book) that the geographic center of the U.S. would boom. However, it was recently reported that after months of losses the top investor sued to get their money back late last year.
Her ability to pick the right stocks turned out to be as fleeting as Maureen’s NFL picks. This is not uncommon for many money management stars. The capital market prices – like the Las Vegas point spreads – are used to determine the point where there are equal number of buyers and sellers. For the NFL game, the point spread is used to get an equal number of people betting on each team.
This is the beauty of efficient capital markets, in that the current price already reflects all available information. In the financial modern markets, updated information is reflected in stock prices within nano seconds. It is the reason why we strongly encourage asset class investing which invests money in all the publicly traded stock and bond markets using the current prices as the best guide to value.
Investing this way allows you to take advantage of the information regarding risks and return that the majority of the investors believe is fair, and avoid following the luck masquerading as skill exhibited by some money managers from time to time.
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