HBO's Real Sports recently ran a segment on an Arkansas high school football coach who's won three state championships in nine years, and he's done it by shunning two tactics that nearly every other football team at every level uses. Kevin Kelley, the coach of Little Rock's Pulaski Academy, almost never punts and always goes for an onside kick after a score, instead of booting the ball downfield.
To the average football fan this strategy may sound like the surest way to defeat, but Kelley's 104-19 record alongside his three state titles offers proof that it works. Like Billy Beane in Moneyball, Kelley has discovered inefficiencies in his market, and he's exploiting them. For investors, there are a number of takeaways from Kelley's success.
1. Do the math
Kelley crunched the numbers before moving ahead with his aggressive strategy, and he found that on kickoffs, the other team only gains an average of a 14-yard advantage from recovering an onside kick versus running back a kickoff. Similarly, if Pulaski punted, Kelley discovered just a 15% lower likelihood of the other team scoring a touchdown than if his team had failed to convert on fourth down. For Kelley, that 14-yard or 15% difference is not worth giving up the ball.
For investors, on a basic level this means understanding the chances and consequences of different outcomes. Know your company's expected growth rate and factors that could cause it to change. If it's a dividend stock, find out what the payout ratio is and what factors could affect future payments. A simple valuation model can help give you a sense of what the market sees in that stock's future.
2. Beware of loss aversion
Our instincts often deceive us. It's human nature to value losses more than gains, and some psychologists say we do so by twice as much. This explains why coaches so often punt on fourth down. The agony of giving the ball away with good field position outweighs the satisfaction of continuing the drive, despite what the numbers say.
Investors fall victim to the same instincts. Studies have shown that shareholders tend to hold on to losses for too long and sell gains too quickly. Remember, a stock doesn't know you own it. If it's down, there's no guarantee it'll get back to even. Examine your investments as objectively as you can, and be aware of "anchoring" (giving too much importance to a specific number, such as the purchase price of a stock).
3. Don't follow the herd
Kelley has clearly staked out his own path and is undeterred by any skepticism of his approach. As Warren Buffett said, "Be greedy when others are fearful, and fearful when they are greedy." Some of the biggest potential gains in the market come from unlikely turnaround stories or overlooked growth companies.
In late 2008 and early 2009, when the market hit rock bottom, Sirius XM Radio (Nasdaq: SIRI ) traded for as low as $0.08 a share. Fresh from the merger of the two formerly independent satellite radio companies, the new enterprise was racking up quarterly losses of over $200 million, and its partners in the auto industry were on life support. An investment of $530 million from Liberty Media (Nasdaq: LMCA ) in February 2009 helped stave off bankruptcy, and since then, the satellite radio company has become solvent and profitable. Its shares now trade for over $2. Investors who got in between November 2008 and March 2009 and held on to their shares reaped returns between 10 and 20 times their initial investment. This dramatic comeback might explain why Sirius XM shareholders are among the most vocal partisans on our website.
4. Question others' assumptions
Finally, Kelley's story teaches us to look at things differently from those around us. His instinct made him question the wisdom of giving the ball back by punting or kicking off. When the HBO reporter suggested that football is a game of field position, Kelley retorted, "Not if you score touchdowns." The coach delights in taking a hatchet to football's sacred cows.
While this teaches investors that the most successful approach might often be your own, we can see the best evidence for a unique point of view in the innovation of entrepreneurs.
Tales of Apple (Nasdaq: AAPL ) founder Steve Jobs' iconoclasm are well known. While other companies spend millions of dollars on market research, Jobs scoffed at the idea, saying, "It's really hard to design products by focus groups. A lot of times, people don't know what they want until you show it to them." Similarly, Apple's retail strategy was initially met with skepticism, but the iPhone maker now leads all U.S. retailers in sales per square foot. You can see that approach becoming an inspiration for Tesla (Nasdaq: TSLA ) and J.C. Penney (NYSE: JCP ) , with Tesla having adopted an Apple-Store-like appearance for its Roadster showrooms while J.C. Penney brought on former Apple executive Ron Johnson to lead the retailer.
Coach Kelley is perhaps most in his element when discussing the subject of risk. When asked if his strategy is risky, he flips the question around and insists other coaches are the ones taking unnecessary risks. For him, the answer's obvious: In football, the biggest risk you can take is giving the other team the ball. Otherwise, they can't score.
In investing, some of the biggest unnecessary risks we take are strategies like selling early to lock in gains, or avoiding an undervalued stock or sector because no one else is touching it. There's actually one such sector selling at rock-bottom prices right now that investors are simply ignoring. Even Warren Buffett said, "Well, it clearly doesn't make any sense. If I had a choice of buying or selling these companies, I'd be buying."
You can learn all about this undervalued sector and its most promising stocks in this special free report: "The Stocks Only the Smartest Investors Are Buying." Get your free copy today. All you have to do is click right here.