Are the Lakers a Sure Thing?

For the 20-year period ending in 2007, the Los Angeles Lakers’ N.B.A. championship record did a surprisingly good job of reflecting the stock market. When the Lakers won, the market usually fell; the market rose when they lost. Between 1987 and 2007, this “indicator” was wrong only three times. As Ed Carson writes: “An investor who put down $1,000 into the Nasdaq at the start of 1987 and stayed fully invested through 2007 would have ended up with $7,604. But an investor who bought the Nasdaq in years the Lakers lost and stayed in cash when the Lakers won would have finished with $21,189.” Thankfully, Carson points out that the “Laker Indicator” is a perfect illustration of the dangers of assuming causality where only correlation exists: “But what if instead of the Lakers, we substituted put-call ratio or a bulls-vs.-bears indicator. A 20-year stellar track investing record like the Laker indicator would sound like a sure thing.” [%comments]

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  1. Dave says:

    It just dawned on me that it’s ridiculous that the Bulls and the Bears both play in Chicago.

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  2. Nick says:

    As a Uchicago kid, I’m pretty eager to see the implications of catastrophic financial meltdown on Fama’s efficient market hypothesis theory and its assumptions.

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  3. William G says:

    That wouldn’t help you anyway, even if it was a sure thing. How do you know if the Lakers are going to win this year? What you need is a leading indicator. Lakers won this year, so the stock market is going down next year.

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  4. Stephen says:

    this is so lame… they arbitrarily started the clock in 1987 during the last few years of the “Magic-Showtime” era… why not include 1980, 1982, and 1985 when they also won championships? Oh yeah, the stock market went up during those years.

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  5. Ed Carson says:

    In response to William G.’s comment,

    I believe that if one uses fiscal years’ ending May 31 … staying fully invested would leave with $6057 on May 31, 2008.

    Using the Laker indicator would result in $12,048. So the outperformance is actually a little greater that with a straight calendar year.

    Why May 31? It’s pretty close to when the NBA Finals in June, and the Lakers often would be out of the playoffs before the end of May, so it seems like a fair proxy as a coincident indicator.

    However, the Laker Indicator was even MORE effective as a leading indicator. A ‘savvy’ Laker-based investor would have a pretty good idea if the Lakers have a real shot at winning the championship by the end of February.

    So starting with February fiscal years, staying fully invested
    would have left you with $5,363 as of Feb. 28, 2008. But the Laker indicator would have given you a whopping $19,956. (FYI, March fiscal years result in very similar numbers).

    With a Feb./March fiscal year, Laker investors get almost all the runup to the March 10, 2000 market top, and then get back in near the effective market bottom in early 2003.

    I didn’t use those figures initially because I thought it would take WAY too long to get to the point that obviously there is no Lakers-stocks link.

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  6. Jallen says:

    Me: I used to think correlation implied causality. But then I took a statistics course.

    She: I guess the course worked then.

    Me: I’m not sure…

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  7. M says:

    This humorous example for illustrating that correlation does not necessarily indicate causation, and that the correlation might not continue in the future. However, sometimes there may in fact be a connection that explains the correlation between seemingly unrelated events.

    Perhaps there could be a professional sports team whose performance is highly correlated to the stock market because the amount of money available to the owners or investors in the team is affected by prior market performance. Perhaps when the market is good, investors chose to invest more in stocks. When the market is poor, perhaps some investors put more money into pro sports teams.

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  8. meter says:

    “Thankfully, Carson points out that the “Laker Indicator” is a perfect illustration of the dangers of assuming causality where only correlation exists…”

    There is certainly no causality, but most likely also no correlation – just coincidence.

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