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What investors can learn from the 1986 NY Football Giants


Football season is here, and both college and pro gridiron fans are again settling into the weekend routine - watching games, eating large quantities, and talking about the great history of the sport. In that history lies many lessons in perseverance, toughness and how to do an end-zone dance without looking foolish. Today, I will look at one National Football League (NFL) season that was memorable to me for many reasons (including the fact that I had spent a few summers working as a pretzel vendor at Giants Stadium during college breaks). I will do so to relate it to an important point for investment advisors and their clients about keeping patient, and waiting for your chance to allow your portfolio to reach its potential.

So, consider the season of 1986 New York Giants (often referred to as the "football Giants" even though the Giants baseball team moved from New York to San Francisco over 50 years ago). The Giants at that time were lovable losers, having endured many horrible seasons in the 1970s and early 1980s, yet selling out every game - and with a waiting list for season tickets in the tens of thousands. The Giants team of 1986 started with revived hopes, mainly due to some star players who appeared to be entering their prime. As with Giants teams of that era, they played exceptional defense, and offense was always what made Giants fans wary.

The team lost its opening game to their arch-rivals, the Dallas Cowboys, but then reeled off five straight wins, mostly against weak teams in which the Giants played just well enough to win, and the defense carried the much-maligned offense to victory. In week six, the team scored 35 points in an uncharacteristic blowout of Philadelphia, and then settled back into their offensive mediocrity with a loss to Seattle and a narrow victory against Washington. Their record stood at 6 wins and 2 losses at midseason, yet Giants fans were their skeptical selves - they would say that the team played great defense every week, but the offense was not explosive enough.

The Giants then ran off five more victories in a row, and a trip to the playoffs was inevitable. Still, though, the concerns persisted about the offense. The "Jints" had scored between 17 and 22 points in each of those last five wins, and it appeared that the team had championship skills on one side of the ball (defense) but not on the other. However, in the final three games of that 1986 season, with a playoff berth locked up, the Giants' offense seemed to start clicking. It was as if they had made it through the toughest battles of the regular season and the light at the end of the tunnel (Lincoln, Holland, take your pick) was now right in front of them. In week 14 they scored a 10-point victory, and then won by a whopping 20 points in week 15, beating St. Louis by the score of 27-7.

Week 16 came, and observers wondered if the Giants could again muster up enough offense to finish the season 14-2 and clinch home field advantage for the National Football Conference (NFC) playoffs. The team answered that concern with an unlikely 55-24 blowout win over Green Bay to do just that.

The playoffs started with a home game against the vaunted San Francisco 49ers, a powerhouse team at the time. The Giants caught an early break (extra points if you can remember how!) and simply blew away their visitors, 49-3. The team that seemed to have little offensive power had put up 104 points in two games. In the NFC Championship Game, the "G-Men" shutout Washington, 17-0, and by doing so, made it to the Super Bowl for the very first time. I was a recent college grad, watching the game with my father, and I still remember him jumping up and yelling "we're going to the Super Bowl!!" and then realizing he meant that the team was going but sadly, we were not .

The Giants, that all-defense, no offense team that seemingly could not score enough points to be a true championship contender, put up plenty in defeating Denver, 39-20 to win the Super Bowl. In the end, the offense had more than their fair share of the contribution to the team's best season in decades.

So, what's the point of all of this? Think about how the Giants were characterized during much of the regular season. They won week after week, but there was a "show-me" attitude that surrounded the team. As I recall, many fans thought that no matter how good the defense was, the offense would never be able to muster enough week after week to go all the way. Now, let's relate this to some bottom-line points about investor behavior that remind me of fan and media behavior back in 1986.

CONCLUSION #1: PLAYING GOOD DEFENSE IS CRITICAL TO WINNING CHAMPIONSHIPS. Championship football teams do an outstanding job keeping their team from falling too far behind in a game and in a season. We think investing is that way too, and I fear that the lessons of this from 2008 may soon be lost if the stock market continues on its merry way higher. As I have told many advisors lately, if you started 2008 with $100, lost $40, leaving you with $60 at year end, then made 20% this year (as the S&P 500 TR has as ofSeptember 18th), you are still only back to $72. The subsequent climb, and the achievement of long-term investment success is much, much tougher if you don't play good defense!


CONCLUSION #2: MODEST "OFFENSE" IS NOT NECESSARILY AN ENDURING CONDITION. I can't tell you in detail what caused the Giants' offense to perk up that season, but I do know that in the past, investors have suffered from what I call the "dangers of extrapolation." This is when you take the current conditions and assume they will continue out into the future. People who did this in early 2000 (and they did so in large numbers) were left holding the bag. The same thing happened in 2007, when the familiar cry was real estate "can't drop in price" and that consumer leverage was a natural and beautiful thing, not for us to be concerned about...unless you didn't have enough of it. That turned out to be a woefully inaccurate and costly stance for many Americans to take. If you are a financial advisor, don't let this happen to you and your clients again!

We see equity mutual funds that are trailing this market rally. But since their investment process and people are still in place, we believe their lagging performance is more a sign of prudent caution than stupidity. It's more likely that managers who have delivered a good balance of "offense and defense" over longer periods of time will find a more comfortable place today to take on risk following a 50%+ move higher.

And simply because the stock market has zoomed higher at a record pace since early March, we feel this is no time to be extrapolating and assuming that the early signs of economic growth are anything more than stimulus-injected and based on very weak comparison numbers. For instance, if you sold 100 widgets two years ago, you sold only 40 last year, and this year you sold 44, so you are up 10% - but you are also down 56% from two years ago, and that should count for something in today's sound-bite driven world, shouldn't it?


CONCLUSION #3: FOOTBALL SEASON IS BACK!!! ENJOY IT.


Sincerely,

The Emerald Team

(c) Emerald Asset Advisors

www.emerald-eas.com