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]


Dave

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

Nick

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.

William G

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.

Stephen

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.

Ed Carson

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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Jallen

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...

M

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.

meter

"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.

James

End the recession: Shut Down the Lakers

John Cena

I'm pretty excited to see the impact of the disastrous financial crisis on the efficient market hypothesis of Fama's theory and its assumptions.
While the outperformance is actually somewhat larger, with a calendar year.

frankenduf

forget indirect speculation- the lakers are killing against the spread this year- so kobe really is money- a word of caution tho- the celtics are getting abjectly hosed this year against the spread

Adam

That's like the fact that the Yankees only win the world series with democrats in the white house:

41,43: Roosevelt
47,49-53: Truman
61,62: Kennedy
77,78: Carter
96-00: Clinton
09: Obama

YX

Coincidence is a part of correlation

Correlation just an measurement of "When 'A' happened, how often did 'B' happen". It is based on past event only, there is no relationship suggested between A and B, and it has no predictive value by itself

meter

When statisticians speak of "correlation vs. causation," the idea is that two variables are proven to be associated, but only in the latter case can one variable be seen as causative to the other.

In the former there is a definite relationship established.

In the case of coincidence - or perhaps a better word is 'happenstance' - the fact that two variables share a pattern is a random set of events and no proof exists of any clear relationship.

infopractical

This article is a good "correlation vs. causation" example, but it could be embedded with a cautionary "data mining is stupid" lesson as well. What's a story of a franchise with such a history that turned dramatically the other way after some period of time?

Manuel Vasquez

Since the championship is mid year, its equally true that bull markets cause the Lakers to win, and bear markets cause them to lose.

Eric

hmmm perhaps I could make an argument for a causal relationship.

Sporting events like many forms of entertainment are one of the first things families cut out in hard times. The means that in recessions like now all teams see a dip in revenue. This dip in revenue affects smaller market teams much more than the large market teams.

While things like the draft and the luxury tax are meant to help level the playing field in times like now the small markets must cut salaries to stay profitable.

A current example would be the Utah Jazz trading promising young point guard Eric Maynor in order to dump the salary of Matt Harpring. From a basketball sense it was a dumb trade but The Jazz saved almost $10 million dollars because of how it affected the luxury tax. In the next few months we will most likely see many more trades like this where smaller market teams will trade good players in order to get underneath the luxury tax threshold and they may ultimately avoid bankruptcy.

The Lakers are a primary team in the second largest market in the US. While their revenues may be down they do not need to hamper their title hopes for financial reasons during economic contractions.

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