Any lawyer can pick a March Madness bracket or stocks to invest in and try to beat their friends and family. Everyone has their own strategy, but most people are not great at picking winning stocks or brackets. Instead of treating an investment portfolio like a March Madness bracket, consider diversifying to maximize the chances of holding a winner.
Overconfidence Bias
Roughly 90% of Americans think they're above-average drivers — an impossibility, mathematically. The same overconfidence shows up in bracket picking and stock picking. No one has ever submitted a perfect March Madness bracket, and the odds of doing so exceed 1 in 9 quintillion.
Even the Professionals Struggle
Renaissance Technologies, one of the best-performing investment firms in history, profits on only slightly more than 50% of its trades. Studies of day traders in Brazil, Taiwan, and via retail FX platforms consistently find that the vast majority of individual traders lose money over time.
How to Pick the Perfect Bracket (or Portfolio)
If you could submit multiple brackets covering different possible winners, your odds of capturing the eventual champion would improve dramatically. The same logic applies to investing: instead of betting on one stock to outperform, diversifying across many holdings increases your odds of holding the eventual big winners, since a small share of companies tend to drive most of the market's long-term growth.
Final Takeaways
Diversifying rather than concentrating your bets is the best way to benefit from the luck and randomness present in both March Madness and the stock market.
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