A Different Game?

I was out shooting baskets this weekend, thinking about the concept of inversion.  You know, the thing Charlie Munger always talks about.  Inversion is where you start with the end result, and then work backwards to see what steps you would have needed to take to get there.  This works for good things and bad things.  If you want to avoid the downside, start with the bad outcome, and then walk it back to see what path you would have to take to get there.  Then avoid that path.  If you want the upside, again start with the outcome (a good one, in this case), work it backwards, and envision how you got there.  Of course life is full of uncertainty, and there are many paths to success or failure (and a lot of luck involved), but if you are armed with “inversion” in your decision-making toolkit, you probably increase your odds of choosing the right path at the outset.

But this post isn’t about inversion, per se.  It’s about hoops.  

I was shooting baskets this morning, and missing so much, it almost felt like I was trying to miss. There are 18 inches of room between two sides of the rim, and a full-sized basketball has a diameter of just under 9 ½ inches.  You cannot fit two of them through the hoop at the same time – and for a while there, I couldn’t even fit one.

Then I wondered the following: what if James Naismith invented a game[1] where you were supposed to hit the side of the peach basket, and not go in?  In modern parlance, what if the goal was to hit the rim[2] without going into the basket?

So, first question, is it easier to make a free throw, or hit the rim and miss?

For Shaquille O’Neal, missing is almost easier.  He’s a career 53% free throw shooter.  But for most of the rest us that played at least high school basketball, making a free throw isn’t that hard.  Sure, we can miss on purpose, but that leads to the second question.

If the rim were smaller, would it be easier or harder to miss a free throw on purpose?   Easier, right?  Taken to the extreme of a 9-inch diameter rim, the ball wouldn’t even fit through.  But even using the old carnival trick of shaving just 1 ½” off each side (down to a 15-inch diameter) the area inside the rim drops by over 30%, so it is definitely harder to make (aka easier to miss) it when the rim is less than 18” wide.

Let’s go the other way, and make the rim wider and wider.  At some point, we all would be hitting 90% of our free throws, even Shaq.

Can the rim be a metaphor for equity markets?  Is today’s rim wider than usual due to free money and low interest rates?  Or is it narrower because of COVID-19?  Does it change its diameter every day?

We think there are periods where it probably does, but we also believe that the market’s rim will eventually find itself back at the perfect 18” diameter, where it has returned for over a century.