Techempage (techempage) wrote,

Are You a Dean Smith Investor?


You know, one thing I like to do is take information from one area of life and then cross-refrence it from other areas and see what works.

By John Mooney
April 4, 2005

Quick! When does a three-pointer count for nothing?

When it's a dumb shot, and when you're playing for legendary former University of North Carolina basketball coach Dean Smith.

While coaching at Chapel Hill, Smith and his staff scored his players on the quality of their shot selection rather than on the results of their shots. Each attempt got a grade, from a low score of zero to a high of three. The coach emphasized taking the best available shot so much that in this bizarro world, whether the shot went in made no difference at all. That playground, fall-back three would earn you a fat zero on Mean Dean's clipboard. But an unguarded layup, even if it rattled out? Good decision. Three points.

Why would Coach Smith have taken such a strange approach?

He had the Foolishness to realize that although not every layup will drop, such high-probability shots are more likely to go in than not. Though it's anyone's guess what will happen each time you shoot, consistently intelligent play is virtually certain to provide above-average rewards in the long run, just as repeatedly illogical play (for example, jacking it up under heavy coverage) is overwhelmingly likely to leave you with disappointing results over time.

By redefining the rules of basketball, Smith's system provided incentives for his team to focus on process rather than outcome. Players got excited about passing to a cutting man, and they learned to eschew potentially glamorous but low-probability shots. The definition of a well-played game became one that consisted of hundreds of smart decisions, rather than five or six eye-opening but unwise miracle shots.

What can Fools learn from this little parable?

Sticking to a logical investment strategy when it isn't being rewarded in the market is in a Fool's nature, of course. Investors took three-point layups when they bought financially sound and well-run companies like H&R Block (NYSE: HRB) and Berkshire Hathaway (NYSE: BRKa)(NYSE: BRKb) at steep discounts during 2000's flight to quality.

But who among us hasn't beamed smugly after a stock rose for a reason that had absolutely nothing to do with why we bought it? Just as surely as good shots can go unrewarded for some time, the market often rewards bad shots.

For example, let's say you scooped up Martha Stewart Living Omnimedia (NYSE: MSO) at around $8 in May of 2004, shortly before Stewart was convicted. You bought it because you believed the company was well-managed and that it represented a valuable and unique media brand that would parlay its assets into some solid financial results. You believed this even though the current doglike financials didn't support your idea: 2003 was an unprofitable, cash flow-negative year, in which the company's yearly return on equity slipped from 3% to -1%. But you had faith that the numbers would come around shortly.

The stock's performance over the next year would have you joyously plastering your home with sunflowers and doilies, as it more than quadrupled to $37 by February.

A swish. But does that necessarily mean it was a good shot?

No. Good operating results are still nowhere to be seen. The stock now trades at around $22, and the latest 10-K reveals that the company's net loss mounted from $2.8 million in 2003 to $59.6 million in 2004, as cash poured out the doors like blood from the elevator in The Shining. Even so, the stock remains priced at a rich premium to the market and industry -- its forward price-to-earnings ratio, according to Yahoo! Finance, is 535.

As Dean would tell you, this half-court prayer may have banked in, but making a habit out of these kinds of circus shots is going to get you benched pretty quickly. Thanks, Coach.

Of course, the article already takes a basketball concept and applies it to investing. However, I'm thinking of taking the basketball idea and apply it to daily life. Look at the decisions we make daily. Are we getting lucky or are we waiting for the good shots?

And yes, this is a Duke fan taking interest in something from Dean Smith. But hey, he was a hell of a Coach. And everyone knows the record by now:

Mike: 3
Dean: 2
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