It's tourney time, bay-beee!
For all true sports fans, the passing from winter into spring has nothing to do with whether some beady-eyed little furball sees his rotund shadow on Feb. 2. Springtime means The Masters, Opening Day, and the NCAA college basketball tournament. It also means big ratings for CBS parent company Viacom
Anyone interested in the "Road to the Final Four" is probably also involved in some sort of office pool. Here at Fool HQ, some employees participated in a unique form of office pool that involves the auctioning of teams. It's called the Calcutta, it's amazing fun, and it really emphasizes the importance of value investing.
Let me preface all of this (is it possible to preface something in the third paragraph?) by saying that we at the Fool don't condone gambling of any kind. After all, we're investors. Naturally, we would never consider using real money for this kind of debauchery. Instead, we allocated 200 "points" for each participating Fool to "play" with. The person who gets the most points will win some sort of treat from the local bakery. If it's me, I'll opt for the cannolis, or just give me the raw dough and I'll make my own.
Calcutta is simple and fun. You put all 64 teams in a hat, pick one at a time, and then conduct an auction for each team. Your willingness to bid some of your 200 points for a team depends on how well you believe that team will do in the tournament. Your team earns a certain percent of the pot based on how far it advances. The pot is just the sum total of all points bid for each team auctioned off. In our Calcutta, here was the breakdown:
- National Champ = 20% of pot
- Runner-up = 15%
- Teams winning only 4 games = 8%
- Teams winning only 3 games = 4%
- Teams winning only 2 games = 2%
- Teams winning only 1 game = 0.5%
* Note - this only represents 91% of the pot. There are three 3% specials also auctioned off where the bottom-seeded teams are paired up.
To illustrate, if you've picked Duke to win the whole shootin' match, and they actually win it all, then Duke would capture 20% of the pot. Let's say that there are 10 people playing in the Calcutta, each with 200 points to bid with. Chances are, the total pot at the end of the auction process will be 2000 points, because people will use up everything they have to bid for their favorites.
You're now equipped with two pieces of information, the percentage of the pot you'll get if Duke wins, and how many points there are. Because we know that Duke would earn 400 points if they win the national championship, it stands to reason that you'd want to bid less than 400 to own them.
Just like investing, you don't want to pay what you think the company is actually worth. You want to get them at a discount. In the Calcutta, you don't want to bid the full "price" for a team because your goal is to buy the team at as steep a discount to its true value as possible. Naturally, you need to build in some sort of buffer in case you're wrong and to account for unknowns, which discounts the amount your willing to bid even more.
Also, a key strategy is to diversify your holdings and hedge against certain negative outcomes. So, if you think Pitt and Kentucky are going to meet in the Final Four but don't know which team will win, you might want to try and own both. In the investing world, you might not know which nanotechnology stock to buy, so maybe you spend lesser amounts to try and own a basket of Nanogen
The results of our Calcutta draft are as follows. It'll be fun to see how the bidding stacks up with the actual brackets. If you're playing in an office pool, have fun!
Fool Calcutta Top 16 Bids
Kentucky - 140 pts.
Stanford - 130 pts.
Duke - 130 pts.
Oklahoma St. - 90 pts.
Saint Joseph's - 73.5 pts.
Mississippi St. - 70 pts.
U Conn - 68 pts.
Gonzaga - 63 pts.
Wake Forest - 58 pts.
Pittsburgh - 55 pts.
GA Tech - 52 pts.
NC State - 43 pts.
Texas - 41 pts.
Maryland - 34 pts.
UNC - 33 pts.
Kansas - 28 pts.
For those of you who didn't have a chance to call my hotline with all the latest picks, here are a few Hidden Gems for you. BYU will make it to the Sweet 16. Maryland gets upset by UTEP in the first round, Charlotte and South Carolina are stronger than you think. Nevada is money. Pitt faces Duke in the title game, but loses to the Blue Devils 68-62. You heard it here first. Go FRIARS!
David Forrest doesn't own any of the stocks mentioned in this article.