Favorites or the field?


The top five S&P companies account for 22% of the index’s earnings and a similar percent of the market cap.

“To me that is an interesting market question right now. If you were a betting man would you take the other 495? Would you take the field or would you take the Lakers with LeBron, a healthy Anthony Davis, James Harden and Kevin Durant on the team too?” – Carl Kawaja, Invest Like the Best, July 2021

One way to improve decision making is to understand the mechanics of a system. The physics system for example is relatively stable and that’s why, with great work, engineers can land the Perseverance rover in a Martian area twice as wide and one-third as long as Manhattan. Other systems, like social systems, follow the rules of network effects like the friendship paradox.

Sometimes analogies help to understand the type of system. One sporting analogy is to take the favorites or the field. When Kawaja’s episode was released, the Chiefs and Bucs had a cumulative 33% chance to win the NFL big game. Sports vary though. In January 2020, three NFL favorites had cumulative odds of about 30%. Meanwhile the top three NCAAF football favorites had odds of about 75%. Three tennis players at the French Open get a bettor to better than ninety-five percent. Want to bet the PGA Master favorites? The top seven golfers only get you better than a coin flip.

One reason to take the field is that more can go wrong than go right. Something is always happening and it’s more likely to be a “negative tail” event than a positive one. During the 2020-21 NFL season we guessed that Tom Brady would not hit the over on passing yards (he did) by guessing that injury, Covid, and new teammates had a much larger downside area. Kawaja recognizes this too, noting “guys get injured”.

It’s not that the field or the favorite is better, but which is cheaper relative to the expected returns. During the Big Game for instance, things happening (safety, two-point conversation, etc.) are priced higher because people like to bet more on something happening. Successful betting and investing isn’t about finding the best, but finding the best odds. Yes, the Chiefs and Apple are great teams but is there value in the high prices?

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Physics systems or social systems are wonderfully illuminated in Nassim Taleb’s book Antifragile.