On February 4, the Philadelphia Eagles defeated the New England Patriots in Super Bowl LII, much to the dismay of Patriots fans. The next week, the stock market fell 8%, to the dismay of fans of the Super Bowl Indicator.
The Super Bowl Indicator says that the stock market goes up if a team in the National Football Conference (NFC) or a former National Football League (NFL) team now in the American Football Conference (AFC) wins the Super Bowl; the market goes down otherwise.
This theory was correct for 15 of the first 16 Super Bowls, leading the Los Angeles Times to quote a stockbroker: “Market observers will be glued to their TV screens. . . . it will be hard to ignore an S&P indicator with an accuracy quotient that’s greater than 94%.” An NFC team won, the stock market went up, and the Super Bowl Indicator was back in the news the next year, with more fans than ever.
The Super Bowl Indicator hasn’t done well recently (5 right, 5 wrong over the past 10 years), but some cling to its mystique nonetheless. The Eagles are in the NFC, and I’ve been told that several asset managers bought heavily when the market opened Monday after the Eagles’ win. They were shocked by the market’s immediate drop, but their spirits have recovered as the market has rebounded.
The ironic thing about the Super Bowl indicator is that Leonard Koppett, the man who discovered it, intended it to be a humorous example of how correlation is not causation. The stock market has nothing to do with the outcome of a football game. The accuracy of the Super Bowl Indicator is just an amusing coincidence aided by the fact that the stock market usually goes up and the NFC usually wins the Super Bowl. The correlation is made more impressive by the gimmick of counting the Pittsburgh Steelers, an AFC team, as an NFC team. The excuse is that Pittsburgh once was in the NFL; the real reason for counting Pittsburgh as an NFC team is that Pittsburgh won the Super Bowl several times when the stock market went up.
Koppett thought that, surely, everyone would get the joke since no one would be foolish enough to think that stock prices have anything to do with football games. Many did not get the joke. They jumped to the conclusion that Super Bowls are a useful stock market predictor because of an irresistible hope that the market can be beaten.
A book was once published on how to win at the dice game Craps based on an exhaustive and exhausting study of 50,000 dice rolls the author had recorded at a Las Vegas casino. Even though dice have no memory or plans, the author convinced himself that there were profitable patterns in these random rolls. For example, the sequence 4–4–11 can be expected about 20 times in 50,000 roles, but occurred 31 times, so the author advised betting on 11 whenever 4 comes up twice in a row. The only good thing about this system is that the more hours this author spent studying the numbers, the fewer hours he spent betting on coincidences.
I once sent a prominent technical analyst some price charts and, sure enough, he identified some “profitable” patterns. When I told him that the price charts were just a recording of coin flips, he concluded that technical analysis can be used to predict coin flips.
And so it goes. We have this ingrained desire to make sense of the world, to believe there are patterns waiting to be discovered. This desire is particularly strong in the stock market because patterns, if real, would be profitable.
Many stock market patterns would be laughable, except for the fact that people have wasted money believing in them. The market does well in years ending in 5. The market does well in years ending in 8. The market does well in Dragon years in the Chinese calendar. Look at the clothes worn by television personality Vanna White, the water level of the Great Lakes, and sales of aspirin and yellow paint.
The New York Times once reported that an investment adviser based his recommendations on readings of comic strips. Money magazine reported that a Minneapolis stock broker selected stocks by spreading The Wall Street Journal on the floor and buying the stock touched by the first nail on the right paw of his golden retriever. The Boston Snow (B.S.) indicator uses the presence or absence of snow in Boston on Christmas Eve to predict the direction the stock market will go.
In 1996 The Motley Fool advised readers that their “Foolish-Four” stock-picking system, based on data for 1973 through 1995, “should grant its fans the same 25 percent annualized returns going forward that it has served up in the past.” The Foolish Four system was as follows:
• On January 1, calculate the dividend yield for each Dow stock.
• Choose the 10 stocks with the highest dividend yields.
• Of these 10, choose the 5 with the lowest price per share.
• Of these 5, cross out the one with the lowest price.
• Invest 40% in the stock with the next lowest price.
• Invest 20% of your wealth in each of the other three stocks.
The complexity of this system made it appear scientific. In reality, the complexity was needed to make the coincidental correlation stronger — like counting the Pittsburgh Steelers as an NFC team.
Two finance professors looked at data for 1949-1972. The Foolish Four was a flop. They looked at stocks chosen on July 1 instead of January 1. The Foolish Four was a flop. In 1997, the Motley Fool replaced the Foolish Four with the “UV4.” In 2000, both the Foolish Four and the UV4 were discontinued.
The Foolish Four was no more useful than the Super Bowl Indicator. Both are just evidence that spurious correlations can always be found — in coin flips, dice rolls, and stock prices — and should not be trusted.
The underlying trap is the ill-founded belief that the stock market is a national casino, and the only way to make money in the stock market is to predict whether prices will go up or down, much like predicting dice rolls and roulette spins.
We are hard-wired to think that the world is governed by regular laws to discover and exploit. We think that stock prices cannot be random. There must be underlying patterns, like night and day, winter and summer. Our gullibility is aided and abetted by our greed — by the notion that we can get rich by discovering these hidden patterns. The inconvenient truth is that zigs and zags in stock prices are mostly random, yet transitory patterns can always be found in random numbers. If we look for them, we will find them and be fooled by them.
In fact, the stock market is much simpler (and more rewarding) than casinos — which are zero-sum games. Casino owners make money, so the average player loses money. Not so with the stock market. Corporations make profits and pay dividends, so the average investor makes money — historically, about 10% a year — not from predicting whether stock prices will go up or down, but simply by investing in stocks instead of bonds and bank accounts.
The real secret to making money in the stock market is simple. Don’t overpay for financial advice, and don’t churn stocks based on patterns that are worthless serendipity. Instead, buy stocks in profitable, well-managed companies at fair prices and spend your time enjoying life instead of foraging for patterns.
Gary Smith is the Fletcher Jones Professor of Economics at Pomona College and author of “Money Machine: The Surprisingly Simple Power of Value Investing.” (AMACOM, 2017)
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Also: How value investors can take advantage of Mr. Market’s erratic behavior