Note: This article appears on the ETFtrends.com Strategist Channel
By John Lunt
Sports, like investing, often invoke definitive pronouncements that a victory for a certain team is “impossible” while victory for another team is “inevitable.” A championship in Cleveland has spent more than a generation in the “impossible” category. In fact, ESPN debuted a film in May 2016 that included the following description: “Of all American cities that have at least three major sports franchises, Cleveland is the only one that has failed to win a championship in the last half-century. Those sports teams, and the hearts they’ve broken over and over again, have inspired a different name for the city, and the title for this 30 for 30 film: ‘Believeland’.”
Last week, ESPN quoted a 70-year old Cleveland cab driver who said the following: “I’m telling you, this is Cleveland, Ohio, people get their hopes up. They get their hearts broken. They just don’t understand, Cleveland will never win anything…I want the Cavs to win, but I know they will not. … And after they lose, [LeBron] is out of here, because he can’t win.”
The Cleveland Cavaliers defeated the Golden State Warriors in one of the most remarkable comebacks in sports history. As NBA Commissioner Adam Silver presented the Cavaliers with the championship trophy he said, “To Northeast Ohio and Cleveland: The curse is over. The 52-year drought has come to an end.”
If a Cleveland championship in any sport seemed impossible, then another NBA title for the Golden State Warriors seemed inevitable. The team finished the regular season with the most wins in NBA history. It featured the two-time MVP in Stephen Curry. The Warriors won the first two games of the NBA finals by a record combined total of 48 points. Famed ESPN commentator Stephen A. Smith said the following after game two: “The chances of the Cavs winning this series is zero.”
In the minds of most, a Warriors championship was completely inevitable after they went up 3 games to 1. No team in NBA finals history had gone on to win the championship after facing a 3 to 1 deficit. Sports can remind us of important lessons that apply to ETF investing: the seemingly impossible outcome can happen, and what experts deem inevitable may not materialize as expected.
It would have seemed impossible that money-losing dotcoms would receive billion-dollar valuations in 1999 or that banks would lend money to people without jobs in 2007. Would you have predicted that the entire financial system would be on the precipice of nationalization in 2009 or that money market rates would still be less than 1% several years later? It seemed inevitable that interest rates would move higher and inflation would rise as central banks printed money. In 2014, it was seemingly impossible that a barrel of oil would drop from $100 to $30 within two years.
Ten years ago, it would have seemed unbelievable to imagine that in 2016 there would be more than 2,000 ETFs globally, covering an enormous variety of asset classes and market factors. The continued dominance of mutual funds for retail investors and the emergence of hedge funds for institutional investors seemed inevitable. ETFs have done the impossible, and disrupted both industries. Five years ago, it seemed impossible that total ETF assets would exceed the amount of assets in hedge funds, but according to some expert calculations, this has happened!
When investors use terms like “impossible” or “inevitable,” they are embracing a pretended specificity surrounding investing that simply does not exist. Instead, successful investing often requires one to embrace a degree of ambiguity and uncertainty. We do not expect complete randomness, but instead subscribe to the importance of investment decision-making that strives to tilt probabilities in favor of success. Investment management also requires the vision and creativity to see how the impossible might supplant the inevitable.
ETFs are designed to be valuable tools in an investment world that confound the impossible and the inevitable. In an uncertain world, the ability to use transparent, targeted, and traded ETFs may tilt the probabilities in favor of the investor. ETFs are designed to allow investors to implement unique views on diversification, to overlay sophisticated risk management tools, and to uncover opportunities for return. Rallies and declines that seem inevitable may be peppered with episodes of the impossible. Fortunately, there are many ETFs that have the potential to be the LeBron James of your investment portfolio. Winning or losing in sports or investment portfolios is not impossible or inevitable. Just ask Cleveland and Golden State.