The Triad Perspective

Triad Investment Management, LLC is a SEC-registered investment adviser based in Newport Beach, California.  We manage portfolios, including retirement and corporate accounts, and provide investment counsel to our select group of clients, which include:
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Four Play

I played basketball as a kid, but never in a formal league. I'd play on school playgrounds, or home driveways, occasionally in a real gym with hardwood floors, but let's face it: I was a basketball hack. Not only was I too short, I wasn't particularly fast or strong. Other than that, I was good.
Over the years, I've watched a lot of basketball, although with the way my Los Angeles Lakers have been playing the past few seasons, I don't seem to be watching as much. I know, I'm a fair-weather fan. Bottom line, I'm no basketball expert. So, with that armchair non-expertise, let's discuss the current revolution in basketball.
Basketball seems to be a simple game. Run down the court, shoot the ball and, prior to 1979, you scored two points. The three-point shot came into being during the 1979-80 National Basketball Association (NBA) season. An arc 23 feet and 9 inches from the basket marks the three-point line. Make a shot behind this line, get three points instead of two. That might not seem like much, but it's 50% more points per shot made.
Recent successful teams--Golden State Warriors, Houston Rockets--have discovered the three-pointer is remarkably effective. The rub is you need to make the shot. Almost 24 feet from the basket, with a tenacious defender all over you, it's a lot tougher than a layup from under the basket. More reward, but also more risk of missing the shot.
But a secondary effect of the three-point shot was noticed. Yes, a long three-pointer was worth more points. But it also caused the defensive team to move out further from the basket. Now, instead of taking a three-point shot, the ball could be passed to a teammate closer to the basket. Here, the odds of success were better, given the closer distance and, more importantly, the increased chance of defenders being preoccupied with defending against the three-point shot. Teams attempting to score could " spread the court " by moving the ball further from the basket, forcing the defense to cover more court area and weakening the defensive effectiveness.

Yet another effect of spreading out the defense was observed. When players were in three-point range, the three-pointer often made sense. If players were close to the basket, the layup yielded the most points. Defenses reacted by logically increasing their focus against these two shots. Result? That left the middle open. Teams started to notice the improved odds of shooting mid-range shots, neither very close nor very far. Risk paired with reward.
A few teams have taken it to perhaps its final extreme. The Philadelphia 76ers have added a " four-point " line to their practice court. Let's be clear, there is no four-point shot in the NBA. What the Sixers have done is created an artificial arc five feet beyond the three-point line. That's a whopping 28 feet and 9 inches from the basket. A long, long way. Despite not getting more points for a much more difficult shot, it still forces the defending team to spread out even further from the basket to guard against the shot. Which creates opportunities to pass the ball to an undefended teammate, who can shoot a closer, easier shot. Opportunity is created.
By this point, if you're not thoroughly confused, congratulations. You're probably wondering what's basketball got to do with investing? Like investing, basketball--as well as sports, marriage, children, life in general--involves risk and reward. How tough is the shot--that's the risk--and how much reward--points--do I get for each successful shot?
Smart teams have learned to analyze the data and use it objectively. Three point shots offer more reward adjusted for the extra risk? Then we'll take more three-pointers. Same for layups or mid-range shots. Wherever the best return can be obtained, that's where the best teams are positioned.
The similarities with investing are easy to spot. Successful investors seek a level of risk that's commensurate with the potential rewards. Great growth prospects--like a longshot three-pointer--purchased at extreme valuations might not lead to investment success. And lower risk but slower growth businesses--like a layup--can be bought at seemingly "cheap" valuations. These "layups" can turn out to be cheap for a reason--they're investment dogs.
We aim for the investing "four play"--waiting for the defense to be really stretched out. That's the financial equivalent of markets that are misbehaving and volatile, reacting emotionally rather than rationally. We've found these occasional periods can be highly productive for our investment approach. They don't come around often, but these buying opportunities can be the basketball equivalent of scoring a four pointer.

-John Heldman, CFA

Past performance does not guarantee future results.  Results are presented net of fees and include the reinvestment of all income.  The opinions expressed herein are those of Triad Investment Management, LLC and are subject to change without notice. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of any securities discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data. Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in any securities mentioned herein. Triad Investment Management, LLC is a SEC-registered investment adviser. More information about us is included in our SEC Form ADV Part 2, which is available upon request.  

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