My high school basketball coach used to say “offense sells tickets, defense wins championships.” I’m sure he was not the first to say it, nor was he the last. Looking back nearly 30 years later and with the assistance of Google, it appears that Bear Bryan is attributed to the original quote.
As it relates to investing, I think this wisdom could also apply. Whether day-trading or trying a new strategy with options or biotech stocks, the allure of “fast money” is ever present. There’s even a popular show named after it. Offense or, in this case gravity-defying returns, really does sell tickets. I’m sure Michael Jordan would agree that a gravity-defying dunk would do more for the crowd than getting a rebound.
The way we are wired, emotions sometimes keep our attention focused on the flashy and the exciting. Not on the basics or fundamentals.
This sometimes moves us away from the important, but less urgent things that may need our attention and focus. When you add in hundreds of expert opinions and hyperbole about why, when, and how to invest, sticking to a simple, disciplined, and unbiased strategy that is immune to emotions and that also adapts to employ both offense and defense can feel daunting.
This is especially true when everything seems to be working perfectly. Even the best investors sometimes have a hard time distinguishing between luck and skill. But this can also apply to periods where it feels like the sky is falling. The knee jerk reaction is to focus only on offense or only on defense, but rarely have the flexibility to hold both of them in our mind at the same time and not get caught up on which way the market is supposed to go. The market will go wherever it will, whether anyone agrees or not that it is the right direction.
The binary, or on or off, way of looking at investing has burned more than a few investors. Cognitive and emotional biases and social pressures make it harder to disconnect from our personal feedback loop as we seek to minimize regret and avoid cognitive dissonance. This is why an undisciplined, discretionary approach can lead to inconsistent results over time.
In basketball, I’m sure even some great coaches will look past the poor defense and rebounding as long as they are ahead in the game. But when they are trailing and the clock is running out, good defense or good free throw shooting in the last quarter may not be enough to overcome a poor showing in the first three quarters.
So it is with investing. Putting together a defensive strategy in the middle of a market meltdown may be too late. Just as ramping up offense after a long and profitable trend has run its course won’t make up for lost time.
Some risk-managed approaches take too little risk during the periods of low volatility, only to give back the good returns during the bad times. Do you have Steph Curry or Klay Thompson stop shooting when they have a hot hand, because their team is ahead by a few points? That wouldn’t make any sense, would it?
But what if you had a systematic approach to take more risk when you were being rewarded for it and take less risk when you weren’t being rewarded for it? If you could lose less money during the bad times and make a little more during the good times, you won’t feel as much pressure when the clock is running down in the fourth quarter when you may have a comfortable lead.
At Straightway, we have models designed to adapt the beta (or risk exposure) based on fundamental analysis, risk analysis, economic analysis, technical analysis, and sector analysis. These models are not perfect. No model is. They are designed to be different and work different from each other.
But by combining them, you now can have different tools for different seasons and you can unlock the only free lunch on Wall Street, diversification. Having multiple analytical disciplines is half of the battle. The other half is being able to systematically use both offense and defense. Fortunately, each of our models adjusts the risk based on each discipline to employ both offense and defense.
Michael Jordan and the Bulls of the late 90’s were an incredibly dominant team offensively, but let’s not forget how strong they were defensively. Jordan won Defensive Player of the Year in ’87 and Rodman won it in ’89 and ’90. Jordan was All-Defensive First Team nine times. Rodman led the league in rebounds for seven years straight and was All-Defensive First Team seven times. Pippen was All-Defensive First Team for eight years in a row. MJ and Pippen rank 3rd and 6th, respectively, as All-Time Steals Leaders. Jordan also ranks 2nd for All-Time Blocks for a Guard.
If you are a financial advisor that is approved to work with independent registered investment advisors and are interested to learn more about how adaptive beta strategies can help your clients, please click one of the “Free Consultation” buttons to schedule a free 30 minute consultation. I look forward to working with you.
Jim Worden, CFA, CMT, CAIA Founder | CEO | CIO
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale of purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
