The last year or so has been one of the most volatile in recent memory for stock markets around the globe. From the Dow Jones spike of 29,000 in February 2020, to a low of around 19,170 in March of 2020 in the immediate aftermath of the COVID-19 shut downs in the US, to a current, all-time high of over 32,700 in mid-March of 2021, it’s been a wild ride.
As I’ve followed the market over that period, it’s struck me how similar building a successful growth portfolio in the market can be to building a successful pro football team. This article is intended as a way to explore some of those parallels and see how well the comparison holds up.
Buy low, sell high
Only a day or two away from the beginning of free agency, this foundational tenet of economic markets seems appropriate to start with. One of the most important aspects of building a successful football team is optimizing value: Deploying your fixed assets (cap space, draft picks) in the way that results in the best performance return that you can get.
Concrete examples of this would be using a seventh round pick on a player like Kamren Curl, who was able to fill a starting role on his first year on the field, or signing a free agent like Cornelius Lucas to a two-year deal paying him $3.8M, when he played the first year of his contract at a $7.4M valuation.
Not so sure I'd want to franchise someone in this position on this chart. pic.twitter.com/usw6TgcEJn— Seth Walder (@SethWalder) March 12, 2021
Unfortunately, the past decade of Washington Football Team management is also riddled with cautionary counter-examples. Time after time, Washington “bought high,” and proved why doing so is such a risky idea. Whether it was the war chest of draft picks offered up for RG3 in 2012, the record-breaking cornerback contract for Josh Norman after his 2015 All Pro season, or the record-breaking safety contract for Landon Collins after his 2018 Pro Bowl season, Washington was saddled, to varying degrees, with the consequences of having made poor investment choices.
Washington’s not the only team in the league to make poor decisions like this however. The Jags signed Panthers’ guard Andrew Norwell to a record breaking deal after his 2017 All Pro season, and Norwell promptly went on to have a mediocre tenure in Jacksonville. Each year, teams buy high, when they should be buying low, or not at all.
Buying high, immediately after a player has had a top end season or performed uncharacteristically well, should be avoided. There is, of course, the chance that they’ll perform well again, but the more realistic possibility is that they’ll “regress to the mean.” That’s a fancy way of saying their great season is more likely to be an outlier than it is to be a “new normal.” They may still be good players, but the chances are, you’re going to be paying more than they’re worth. Let inexperienced buyers get sucked into those bidding wars while you seek out value elsewhere.
The key with players, like stocks, is buying when the value proposition is strongest. On low risk, inexpensive contracts or with late round picks, target players with the highest upside. If they wash out, the consequences are small. If they hit, your team (and portfolio) will see substantial returns. If they miss, the loss can be absorbed by virtue of the next tenet.
Balanced portfolio/Benefits of diversification
One of the key features of both stock portfolios and building sustainably successful teams is hedging against risk. If one company goes bankrupt or one star player goes down, you don’t want it to bring down your entire investment. One of the best ways to protect against risk is to diversify - hold a broad range of assets, often of different individual risk profiles, that in the aggregate shield your portfolio from complete collapse in the case that something goes terribly wrong.
The larger percentage of your available investment dollars (or cap space) you have tied up in any single stock or player, the more vulnerable you are to devastation if something goes wrong. If a Patrick Mahomes, DeShaun Watson, or Dak Prescott, occupying 20%+ of a team’s cap, goes down with injury, the likelihood that the season will be completely lost is fairly large. In the same way, if you held Enron stock in 2000, by the end of 2001, that component of your portfolio was essentially worthless as a result of their declaration of bankruptcy. Since childhood, each of us has been told “not to put all our eggs in one basket.” That’s good advice for football teams (and portfolio managers) as well.
Fear of missing out (FOMO)
On the eve of free agency, this is one of the most insidious of the stock market behaviors we see among football teams. “Fear of missing out” is worry that, if you don’t buy Player X now, at whatever ascending price he’s commanding, you’re going to miss the next big thing. Among investors - or, more likely, day traders - this often leads buyers to chase stocks as they increase in price in the vain hopes that the peak has not yet been hit. In practice, what often happens, is the trader gets his buy order filled on a stock that, over the next several days proceeds to drop in price, as those who saw the opportunity earlier sell, realizing their gains.
FOMO happens in free agency as well, resulting in bidding wars for hot commodities. A player like Kenny Golladay, who is held up by many in the NFL chattering class as the top wide receiver available, after Allen Robinson and Chris Godwin have been tagged, is likely to be target of a bidding war in free agency this year. Last year, it happened with Jadeveon Clowney, who was pursued by the Seahawks, Saints, and Titans. The Titans eventually “won” the Clowney sweepstakes, but given that he finished the season with 8 starts, no sacks, and 19 tackles, one wonders whether they wish they had.
If a general manager (or investor) is possessed with what could reasonably be characterized by a “fear of missing out,” either on a draft prospect or free agent, it’s probably time to step back from the edge, focus sights elsewhere, and avoid the next pitfall.
Don’t fall in love with your stock (or player)
In terms of team building, this advice pertains most directly to the draft. Scouts and general managers, like stockpickers, can often become enamored with their own perceived prowess at picking stocks or players, and either overinvest on them on the front end, or stay invested too long in them on the back end. A recent example of this from my stock picking experience was purchasing a telecommunications stock that I thought was going to be a real mover as the landscape began to radically evolve to more robust data networks. I hung in the stock for months, but it languished, swinging 5% here and 5% there, but never moving as much as several other stocks in my portfolio. I was convinced it was going to the moon eventually though, as I had done plenty of background research confirming my speculation about its potential future worth.
In the meantime, my obstinance caused me to incur opportunity costs - missing out on making more money by not being invested somewhere else. In a similar vein, eventually, Troy Apke might turn out to be a decent player, but ultimately keeping a player like him on the team (or in the portfolio), imposes an opportunity cost in that a better performer could be occupying that spot, if given the chance.
One of the most notorious examples of this happening in Washington was Scot McLoughan’s love affair with Matt Jones. We can argue whether Washington overinvested a third round pick in Jones in 2015 - it probably did - but what’s inarguable is that McLoughan stubbornly stuck with insisting that Jones was a significant talent even in the face of years of on-the-field performance to the contrary. We all make bad investments at times, but if we can’t recognize them as such, we’re in real trouble.
Don’t try to time the market
This is a bit of a corollary to the notion of falling in love with an individual player. In stock terms, ‘timing the market” refers to buying and selling stocks in an attempt to guess when they’ll be low and high respectively. Often, what ends up happening, however, is that stocks are bought too late or sold too soon and profits end up being less than what they would have been otherwise.
One of my favorite pieces of stock market lore is that the investment firm Fidelity conducted an analysis of the market performance of the accounts held by its investors. They found that most individual investors performed worse than their general mutual fund, guided by professionals, but that there was one group that performed better: Dead people. In essence, those (non-living) people who stood pat and passively took advantage of the gradual growth of the stock market performed far better than those tinkering regularly to try to optimize gains (those who had forgotten they had accounts also performed pretty well).
How does this apply to the NFL? For me, it’s most applicable to the draft. Trading up in the draft - essentially, sacrificing opportunities to procure multiple low-cost rookies for the chance to select one - embodies the same hubris it takes to try and time the market, a confidence that you’re so clever at identifying talent (or value) that you can beat the inexorable reality that the best hedge against busting in the draft is more picks. If you don’t believe me, take it from the Ravens’ GM, Eric DeCosta:
We look at the draft as, in some respects, a luck-driven process. The more picks you have, the more chances you have to get a good player. When we look at teams that draft well, it’s not necessarily that they’re drafting better than anybody else. It seems to be that they have more picks. There’s definitely a correlation between the amount of picks and drafting good players.
“Be fearful when others are greedy, get greedy when others are fearful”
The above is one of my favorite quotes from investor extraordinaire, billionaire Warren Buffett. In relation to the stock market, this idea builds on FOMO and expands upon it. When others are fearful about missing out (and greedy) and driving prices up in their pursuit of profits, stay away. Chances are, you’ll get caught holding the bag when that exuberance runs its course. Conversely, when other investors are fearful, or cautious because of bad news, or some aspect of a company’s performance, this is where the real opportunity is to make money.
In practical terms, the stocks of pharmaceutical companies often crater after mixed or bad news on drug trial performance. Sometimes, results are so dire that there’s very little chance of recovery. Those companies should be avoided. In other cases, however, there’s a nugget of optimism or potential in the results that could eventually spell success. Buying in at post-crash prices could ultimately produce incredible gains, but not without some serious risk.
In Washington’s case, I can think of two fairly recent examples where they applied this approach and profited from it. Both Jonathan Allen and Montez Sweat fell in their respective drafts because other teams were fearful that they had lingering health issues or conditions that would cut their careers short. Both players have performed at or above their draft position, and have been key cogs in the Washington defense. Aided by thorough due diligence and a broader unease in the market, greed can indeed be good.
Investing is not gambling
Some people see the stock market as akin to a gambling emporium, and some people certainly treat it that way, but the reality is, the house always wins at the casino. In the stock market, the average annual return over the past century has been about 10% per year. Over a substantial time horizon, there are very few investment vehicles that are more lucrative. The easiest way to lose money in the market, however, is to disregard the advice above, ignore the power of diversification and the gradual upward trend of the market - in the aggregate - by overinvesting resources too narrowly and failing to hedge against risk.
Earlier in the week, Ron Rivera expressed a sincere interest in building a sustainable culture the “right way.” I’m of the opinion that doing so will look a lot like building a healthy investment portfolio. We’ll see.
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