What the NBA super-team can teach us about investing

It’s NBA Finals time again and for those that don’t know, I do very much love my basketball. With the Warriors ‘super-team’ making it to the finals again (yawn), it got me thinking about how these so called super teams assemble and how combined talent can work together. When it works at its best, the whole is most definitely better than the sum of its parts. For those that are not that into the NBA try and humour me whilst I attempt to draw some parallels between two of my passions being basketball and personal finance.

So what is a super-team anyway?
Most people draw back to 8 July 2010 which was the day LeBron announced ‘the decision’ as the day that the NBA as we know it changed forever. The decision spawned the Miami Heat “big 3” super-team of LeBron James, Dwyane Wade and Chris Bosh and some role players to fill out the squad. For better or for worse this super-team phenomenon is now in full force and forever lifted the bar for ultimate success. It is no longer enough to have a good duo as you need a full diversified top class ensemble to compete deep into the playoffs.

 

This has led to arguably one of the greatest teams of all time with the Golden State Warriors lining up for their 5th NBA Finals appearances in as many years. Now this team is stacked with genuine all-stars in every position. Even the great Lebron James couldn’t overcome the Golden State Warriors last year with one other star and was ultimately swept 4-0. Much in the same way that having a quality investment portfolio requires more than one good investment to ensure long term success. Not having enough diversification increases your concentration risk and can be a case of all or nothing. Relying on too few different investments means your fortunes are tied to a very limited number of assets and outcomes.

The definition of a super-team is open for debate, but for brevity we will assume it is where you have at least 3 stars in your team. Sounds tough already, but really 2 of these need to be superstar level in the Golden State Warriors era where they have a full starting five of All-Stars! The definitions are subjective, but that’s half the fun. It is an arms race to stack as much talent into your starting five as you can to have any chance of winning a Championship.

It makes sense in much the same way as it does with investing, as the benefit of having a diversified multi-pronged investment strategy is that one of your stars can have a poor performance and the other teammates step in to pick up the slack. Having the right mix of uncorrelated assets smooths your performance at a high level and ensuring the difference between good and bad investment years is reduced (see the below chart for a year by year look at how various asset classes performed since 2003). Last year’s best performer is no guarantee to repeat the dose so spread your investments!

 

So what would an investment portfolio starting 5 look like in drawing inspiration from the 2019 Golden State Warriors?

Imagine a portfolio of investments which was so good that it was talked about as a dynasty, now that is something to strive for. It is hard to achieve and takes patience, investment of time/money, an eye for talent, good management and a touch of luck… but the end result is nothing short of amazing.

  1. Superstar (Kevin Durant) – Elite active equity manager global equities strategy. MVP calibre and perhaps one of the best of all time! This is a Rockstar performer in terms of presence but also subject to a high level of volatility (especially when jumping on his twitter burner accounts!). This strategy would consistently deliver market beating returns and well worth the cost of having it in the portfolio.
  2. Superstar (Steph Curry) – Elite active Australian equities strategy. MVP calibre and arguably the best shooter ever! This is the hometown hero and while it is debatable who is better in Australian vs. Global Equities, the hometown bias is evident and it his team and everyone knows it. Investors feel comfort in knowing the underlying companies from their day to day lives and trust in knowing that these businesses will be around. Much like the Australian equity markets is heavily concentrated in a few key sectors (banks and resources), Steph’s output is heavily concentrated on the offensive end of the court. Not renowned for his defence, his 3-point shooting more than compensates for this!
  3. Star (Draymond Green) – Diversified passive index strategy. I was tossing up with alternative investments for Draymond given his confrontational personality, but ultimately landed on a diversified passive core strategy which complements and brings together all of the specialist components surrounding him. He is a heart and soul of the team and a barometer for their success. Real locker room presence and is the glue that brings it all together with his diversified impact in all aspects of the game at both ends of the floor.
  4. Star (Klay Thomson) – Alternatives strategy. Amazing talents but prone to being underappreciated and snubbed from All-NBA Team voting. Is a specialist and a very different style to the traditional player but can deliver really significant out-performance with limited opportunities. Real sharp shooter and up there in terms of all-time catch and shoot players. Great two-way player with elite defensive skills he offers good downside protection when things get tough, much in the same way as a good alternatives strategy complements traditional equity and property investments.
  5. Role player, but still very good (Andre Iguodala) – High quality defensive fixed income strategy. No ego here, knows his role in the bigger picture and not subject to nerves. This part of your portfolio needs to stand up under the heat of pressure and be depended upon when things are going bad for the rest of your portfolio. Whilst not the sexiest part of investment portfolio is a must have inclusion to provide a reliable foundation for the portfolio.
  6. Notable mention and 6th man due to being new and injury prone (DeMarcus Cousins) – emerging markets equity strategy. What a luxury to have an all-star level player as a backup. He is not likely to see a huge amount of minutes in much the same way that you wouldn’t allocate too much of your capital to emerging markets. Both are volatile and prone to a large gap between best and worst performances.
 

In summary, when diversification in portfolio construction is done correctly (super-team style) it is a thing of beauty as it delivers a diversified source of return with less volatility. You get a smoother ride through the market cycles as you have the benefit of lower correlation to equities, which traditionally is majority of investors’ portfolios. The exciting part is that it has never been easier and affordable to get exposure to these strategies and in many cases can be accessed via your share trading account. The challenge is no longer finding options, but rather filtering through the multitude available to work out which is the right fit for you. Time to play general manager and fill your portfolio roster with the right investments!

 

Personal basketball opinions

  • For what it is worth, I am tipping the Warriors to win the finals in 5 games (head) while hoping for a Toronto in 7 games outcome (heart).
  • The greatest super-team of all time in my humble opinion was the Chicago Bulls (1995-1996) which brought Dennis Rodman into play alongside the GOAT Michael Jordan and Scottie Pippen.

Hope you have enjoyed reading and if you have any questions or feedback on my super-team then email me at pete@pekada.com.au. Go Raptors!

Wealth Collective trading as Pekada (ABN 95 624 612 684), corporate authorised representative (CAR), number 1263725, is authorised to provide financial services on behalf of Communitas Wealth Pty Ltd.

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