This past weekend, as I was doing my Sunday ritual reviewing client portfolios and preparing for the week ahead. I had Hard Knocks on in the background as one does this time of year. As I watched Gruden and the Oakland staff continue to make roster moves. It got me thinking about my upcoming fantasy football draft. I realized that investing is like fantasy football. The same concepts and behavior that makes fantasy football players successful are the same behaviors and decision-making skill that make investors successful. I know it sounds crazy, but hear me out.
The basic principle that most people get confused about both investing and fantasy football is that they think to win you have to be the most right. Meaning you have to pick the best performing player at every position to win the league or the hottest trending stock or industry in the case of investing to outperform the markets. While having the top performer certainly increases your chances of outperformance and victory, it does not guarantee it.
At a fundamental level in both fantasy football and portfolio construction the most important thing is to minimize risk and give yourself the highest probability of not being the most wrong (outperform everyone else) throughout a season, or an investment time horizon, by not misbehaving and making poor decisions.
With the draft day quickly approaching, I wanted to point out some tips that might help you throughout the fantasy football season and also with your investment portfolio.
Do Your Homework
A recent LendEDU survey found that the average fantasy player spends 8 hours per week and 4.31 hours of the workweek on fantasy football. That amounts to $1,186 in lost productivity if we assume the median wage in the US. The study shows what good fantasy players know. To gain an edge over the competition, you have to do the research, that means checking stats, looking at matchups and gathering as much info as you can to make the most informed decision possible.
The same is true for investing. Like there are raw game stats for your fantasy players, there are raw stats for your investments. They are known as earnings calls, and they happen every quarter, and they can be found on the investor relations page of every publicly-traded company. These calls are treasure troves of information. The corporate managers tell you how they plan to grow their company; they tell you how successful or unsuccessful the strategy was last quarter, and most importantly, they tell you the game plan for the next quarter. Most calls also offer insight into broader economic trends that impact entire sectors.
It is certainly not as engaging as watching the red zone on a Sunday or reading every Matthew Berry article going into draft day. But, as Vince Lombardi said the only place success comes before work is in the dictionary.
Diversification Is Key
As tempting as it might be to draft both Deshaun Watson and DeAndre Hopkins, having the top QB/WR duo comes with significant risks. If one of them gets hurt or has a bad game, it could impact the production of the other. By building a roster of players from different teams, your roster risk declines significantly. Sure you might not have the top producing WR/QB combo every week, but you are less likely to have the worst in the event of an injury, poor performance or when it is their bye week.
When it comes to portfolio construction, the same is true. At the moment, technology has been the best performing sector. It is certainly prudent to have technology as a part of your portfolio; however, you do not want all cloud computing companies, just like you would not build a roster of only Running Backs.
Listen To The Experts, Except Not All Of Them
In the fantasy football world, not all analysis is accurate analysis. If you are a successful player, I am sure you read the article, look at the stats, read another article, look at matchups, and formulate your own opinions, which you then act on.
The investment news cycle can become a noisy place. With people throwing out recommendations on TV or jamming your inbox with articles like this one I got 3 times today: “5 Cannabis ETFs to Fire Up Your Portfolio”. Unfortunately, those people do not know anything about you or the other holdings in your portfolio, investment time horizon, risk profile, and many other factors that should be considered when selecting investments.
So while reading marketing emails from companies that offer specific recommendations can provide perspective on the potential benefit those recommendations could offer, that is all it is an opinion by someone who doesn’t know you or your financial situation.
The best-unbiased advice you can get is through your financial institution. They have a vested interest in your success, they will likely provide free market intelligence and depending on the institution they might even have a recommended list offering several companies across many sectors to help you navigate the crowded market.
In FX’s The League Ruxin and Kevin frequently “over-tinkered,” meaning they were overactive with their roster. Dropping good players after a single weak performance, and picking up a flash in the pan performers who would not produce at a similar level in the future.
These emotional reactions are the most common behavioral mistake investors make. Chasing trends, getting FOMO, and selling out of good companies that are temporarily out of favor for short-term reasons are the cardinal sins of investing and fantasy football.
If you have done your homework and know why you have selected the players/investments, do not allow emotions and short term performance to cloud that original investment thesis. If your stock has a lousy performance, go back to the stats/earnings report and try to learn why the performance wasn’t what you expected. Did your WR’s QB get hurt early in the game? Were there broader economic trends that created short-term pressure on that company or industry? Perhaps you are looking at a great buying opportunity! At the same time if your investment has surpassed your highest expectations, maybe it is an excellent time to sell a portion. No one ever gets hurt taking a small profit!
Keep a Deep Bench and Watch Your Matchups
All good fantasy players keep a deep bench, preparing for bye weeks or waiting for particularly attractive matchups. Savvy investors should do the same. Various sectors perform differently in different economic conditions. Keeping an eye on all industry leaders will help you know when to rotate them into the game.
At PSWA, we utilize enterprise cash flow to drive our valuations. This allows us to see when companies on our watch list are undervalued, and we start to think about putting them in the game. However, it is not until they have price momentum under their belt before they might get into a portfolio. We always look for the perfect matchup of attractive valuation and price momentum. Like the top-performing defense against a backup QB, if you see that type of matchup, you are probably going to have a good time.