Last night, I watched the Miami Heat play the Indiana Pacers in Game 3 of the Eastern Conference Finals. The Indiana Pacers jumped out to a 14-point lead early in the 1st quarter (19-5) as the Heat struggled to find any production. This trend continued as the Pacers slightly increased their lead to 15-points (37-22) midway through the 2nd quarter. If a viewer watched the first 25 minutes (of the 48-minute game), they could reasonably assume that the Indiana Pacers went on to victory. However, the Heat pulled within 4-points at half-time (42-38) and outscored the Pacers by 77-50 after the initial 15-point deficit. The Miami Heat ended up beating the Indiana Pacers 99-87 in an unexciting finish.
I used the term “viewer” intentionally because an experienced fan of the NBA would not assume anything.
“throughout 781 games in 2012, only 56 were single-point contests throughout the entire game. This means that 93% of games saw one team leading the other team by double-digits and, in most cases, that lead was eventually lost. Furthermore, there were 974 double-digit leads in those 781 games meaning that the leads were gained, then lost, then gained again. About half of all big leads were eventually lost (49.4%).”
An NBA Basketball Game
My father-in-law has repeatedly told me that he won’t start watching an NBA basketball game until the last 5 minutes. There is so much back-and-forth action with teams continually exchanging leads. One team will shoot 80% for a span of 10 minutes while the other goes “ice-cold.” One player will get into foul trouble early on, limiting his usual contribution. Each of these variables, among many others, will lead to an unsustainable separation, but there will eventually be a regression toward the mean. Good shooters will eventually make shots. Dominant big men will eventually dominate. The best teams will eventually win.
If you don’t believe me, check out Sport Illustrated’s Preseason NBA Predictions. The analysts accurately predicted that Lebron James and Kevin Durant would vie for the Most Valuable Player award while the Heat, Thunder, Spurs and Pacers battle for the NBA Championship.
Here’s a news flash for you:
Watching an NBA basketball game can be very similar to watching your investments in the stock market.
The Stock Market
The stock market consists of buyers being connected to sellers which ultimately determines the stock price. At a given point in time, if there are more buyers than sellers then the price will increase. If there are more sellers than buyers then the price will decrease. There are many other variables that may trigger increased buying or selling activity. These variables, along with the back-and-forth exchange between buyers and sellers, lead to rapid price fluctuation.
If you have downloaded an app on your phone which provides updates on your stock portfolio, then you have most certainly experienced this fluctuation.
- At 10:00 AM, you’re down .94%.
- At 12:15 PM, you’re back to even.
- By 3:30 PM, you’re up 1.37%.
These fluctuations in price, depending on when you view your portfolio, may cause you to act irrationally. Maybe you have the urge to sell a specific stock before it falls a full percentage point -OR- maybe you want to invest your entire savings in an individual company because it’s up nearly 2%. Regardless of what impulsive reaction you’re experiencing, remember to keep things in perspective.
Good teams will win (even if they’re losing at the half).
Good companies will make money (even if they’re down at noon).
Don’t sell Lebron James.