3 Things Investors Can Learn From March Madness

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during the second round of the 2012 NCAA Men's Basketball Tournament at KFC YUM! Center on March 15, 2012 in Louisville, Kentucky.
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It's March Madness, that happy time of year when hoops fans are distracted and brackets are falling apart: Do you know where your top seeds are?

In a valiant attempt to stick to advancing the cause of financial education (at a time when my alma mater University of Miami Hurricanes have a chance of actually making some noise this tournament) I figured I would tie the two together by showing how March Madness can enrich you, even if you don't have any skin in the game.

So, as the NCAA basketball tourney plays on, here are three takeaways for investors.

1. Past performance is no guarantee of future results.

There will always be upsets as the top 64 teams vie to run the table and win the tournament. The first round has already seen 14-seed Harvard upset 3-seed New Mexico, and top seed Gonzaga almost lose to Southern University.

The same thing holds true for investments.

Mutual fund ads always feature the disclaimer that past performance is no guarantee of future results. Believe it. Sure, odds are good that a market-thumping fund manager will continue to beat the market, just as the top seeds will always be the favorites to advance. But there's a reason the games are played.

Take Apple (AAPL), for example. You won't find too many companies as dynamic. It breathed new life into portable media players in 2001. It went on to define the smartphone movement with the first iPhone in 2007. Two years later it rolled out the iPad at a time when consumers didn't think they needed a tablet.

Today? Things haven't been as rosy for Apple. The stock has surrendered 35 percent of its value since the iPhone 5 hit the market. After years of growth, analysts see flat earnings at Apple this fiscal year.

Bottom line: There's no such thing as a sure thing. For years it seemed like Apple could do no wrong. But global market tastes have shifted to cheaper alternatives. Apple's margins are shrinking and the competition is getting fierce. Remember, when you're No. 1 the game is always on. It's never safe to put your guard down and get complacent.

2. Seasoned leadership is a vital asset.

How about those Hurricanes? By the time you read this, "the U" may already be out of the tournament, but it was a pretty remarkable season for the University of Miami.

The team has never been a basketball powerhouse, yet it emerged this year to win the ACC for the first time. It had to defeat Duke and UNC to make it happen -- a pretty impressive feat. And there's one big reason behind that success. Four of the five starters on the team are seniors. They've played together long enough to click on the court.

Investing is the same way. You want either a seasoned fund manager or a proven industry veteran as CEO.

Consider Sirius XM Radio (SIRI). When satellite radio took off, it wasn't run by radio executives. Sirius and XM were standalone companies run by people who were more familiar with the technology that made it happen than the content needed to attract listeners.

Everything changed when Sirius brought in terrestrial radio guru Mel Karmazin. He quickly beefed up the programming at Sirius, and, even though Sirius was much smaller than XM at the time, he was the master architect that combined the two profitless companies into a market darling that's now consistently profitable with a combined 23.9 million subscribers.

Bottom line: Management matters. Don't limit your research to company financials. Spend time getting to know the coach/CEO who's calling the shots and the key players (and bench depth) on the team.

3. A single mistake can knock you out of contention.

March Madness takes no prisoners. Unlike the NBA playoffs, you don't get another chance after you lose a a game. There's no "best of" series where a team can bounce back after an off night. It's one and done: You lose, you go home.

Business can be the same way. A company can make a single mistake that it can't claw its way back from.

Consider Nokia (NOK). The Finnish maker of mobile phones was the top dog through the 1990s. Then it made a few bad decisions and failed to navigate the smartphone revolution that remade the wireless industry. Nokia took too long to embrace Android, and even today is championing the unpopular Windows Phone operating system in the hopes that a long-shot bet can bring it back. Nokia's stock has been in the single digits for more than two years.

Bottom line: Company strategies will shift, and the market will react -- sometimes overreact. So before you buy shares, write down what you think are the company's greatest strengths, weaknesses and potential threats, and what would make you sell your shares. That way, if a company makes a bad call along the way, you already have an exit strategy spelled out to guide you.

Enjoy March Madness. You know you will, even as your bracket picks fall by the wayside. However, don't forget to apply those hard-court lessons to the way you invest.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our newsletter services free for 30 days.

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clarita995

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clarita995

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