The NFL Mistake That Became a Winning Investing Blueprint

Editor's note: Mistakes are inevitable in investing. That's why success in the markets comes down to preparation. Investors who follow a system – and stick to it – are better positioned to make smart decisions when things go wrong. According to Mike Barrett, editor of our Select Value Opportunities newsletter, preparation and discipline can turn unexpected moments into overlooked opportunities...

More than 50 years ago, Bob Trumpy's mistake changed football forever...

The Cincinnati Bengals were playing the Oakland Raiders in the 1970s. After the huddle, the players approached the line to get into position.

However, there was a small problem...

Trumpy, the Bengals' tight end, lined up on the right side of the offensive line – when their play needed him on the left. The quarterback immediately pointed out the error, so Trumpy scurried into the correct spot just before the ball was snapped. Problem solved.

But then, something unexpected happened...

As Trumpy moved, five Raiders defensive players followed him. And in their haste to make the unexpected adjustment... they all crashed into each other.

The "Three Stooges" act caught the attention of Bengals offensive coordinator Bill Walsh...

Walsh realized he could use this new weapon to his advantage by making similar moves – on purpose – to disrupt the defense. The extensive use of shifts became a hallmark of Walsh's most celebrated innovation, the "West Coast offense."

Almost no one has had more influence on football over the past 50 years than Walsh, who passed away in 2007. He transformed the woeful San Francisco 49ers into one of the most dominant NFL teams of the 1980s – and that was only one of his achievements.

Fortunately for us, his blueprint for excellence also applies to the financial markets...

Nearly 30 years ago, Walsh outlined a simple, three-step formula for success. And as you'll see, following these three steps is a surefire way to become a better investor.

The Three-Step Playbook to Outsmart the Market

1. Make a thorough game plan... Then, have the nerve to stick with it.

The hard part of any plan is sticking to it when things go wrong. As Walsh told the Harvard Business Review in 1993 (my emphasis added)...

Making judgments under severe stress is the most difficult thing there is. The more preparation you have prior to the conflict, the more you can do in a clinical situation, the better off you will be...

Say it is the last 20 seconds of a game and we're losing... We have already practiced six plays that we can apply in that situation. That way, we know what to do, and we can calmly execute the plays. We'll have no doubt in our minds, we will have more poise, and we can concentrate without falling prey to desperation.

For many investors, deep and sudden market declines are incredibly stressful...

We can't practice for these kinds of situations like a football team practices a play. But we can (and must) consider how we'll respond before they arrive. That way, as Walsh put it, "We can concentrate without falling prey to desperation."

For example, many folks became indiscriminate sellers when the market crashed in March 2020. They wanted out of everything they owned, no matter the price... They fell prey to desperation.

This is almost never the best course of action. And it certainly wasn't in 2020. Stocks soon rebounded to all-time highs.

That's why you need to decide ahead of time what you'll do with each position in your portfolio if we see a big downturn. Simply ask yourself this question...

If Stock X declines 40%, will I still want to own it?

If the answer is "no," think through what you'll do instead. It's the only way to avoid desperation and the bad decisions that come with it.

2. Develop an edge by seeing what others miss.

Trumpy's mistake in the 1970s probably wasn't the first time something like that happened. However, it inspired the West Coast offense because Walsh saw an opportunity where others didn't.

Investing success also comes from seeing what others miss. For example, many investors make the mistake of only analyzing what a company has done in the past.

I'm talking about things like how quickly revenue has grown or how much operating margins have improved. You can find historical data easily. And as an investor, you can use this information to make educated predictions about the future.

However, what happened in the past is only the starting point. You must also ask questions about what to expect going forward...

Will revenue grow faster or slower than it did in the past? Will profit margins rise or fall?

It takes far more work to ask these kinds of questions, build a case for the answers, and then model the likely outcomes. That's where the edge often lies in investing.

Look at what's coming in the next five years... not just the past five. That brings us to the third and final step of Walsh's formula...

3. To enjoy enduring success, rely on a system that generates unique, high-quality results.

Winning the Super Bowl once is an accomplishment most NFL head coaches never experience. Incredibly, Walsh won it three times in eight years.

Walsh built a comprehensive system designed to win championships again and again – no matter who was on the roster. And that system paid off with specific, unique advantages for his team... like learning more plays and getting more value out of practice time.

Having a system isn't about winning every time. It's OK if you don't score a touchdown with every single investment. The goal is to build wealth over the long haul.

And Walsh's timeless, three-step formula should lead investors to success in the markets... year after year.

Good investing,

Mike Barrett

Editor's note: When volatility strikes, you need a system to rely on. Our new "mystery" market insider predicted the "SaaSpocalypse," before tech stocks lost $300 billion in the shake-up. And on April 7, he's going public for the first time to explain how the rules of the stock market have changed... and to reveal a breakthrough system that could have turned $10,000 into more than $620,000 since 2017.