The NYSE is just a huge fantasy football draft
Published: Tuesday, September 3, 2013
Updated: Tuesday, September 3, 2013 21:09
With the official start of the NFL season just a day away, plenty of people will likely be wrapping up their fantasy football drafts if they haven’t done so already. Like millions of others, I enjoy starting a league with friends and love the excitement that comes with a fantasy draft. However, what I’ve noticed from playing fantasy football is how much I draw on skills so pertinent to one of my other activities: investing.
Albeit, the best fantasy football analysts aren’t also hedge fund managers on Wall Street, but the skills and mentality for both show incredible parallels. Take how you would approach a fantasy football draft. In deciding which players to take, or deciding between two players, you would look at a variety of factors. These parameters could include past performances, difficulty of their schedule, acquisitions of new teammates, a new head coach, and injury history among other things. When deciding what stocks to invest in, you need similar information. How has the stock performed the past few years? Is it improving or declining? Does the company have a new president or business strategy? Are there any risks inherit with the stock?
In the stock market, a “blue chip” is a company known for reliability and consistent performance, such as Google or Caterpillar. In fantasy football, these would be the highly reliable players who consistently perform like Aaron Rodgers or Drew Brees. This name recognition and quality performance is why companies like Google and Apple have such a high stock value, and also why Aaron Rodgers is likely to cost you one of your first few draft picks. And while investing in the big name stocks and drafting the household players will give you a solid foundation, one of the other essentials to succeeding in the stock market, or winning in fantasy football, is to manage risk.
Risk can take on various forms. For example, you can gamble on a stock that has had issues in the past and bet that some adjustment can revitalize it. When Yahoo was struggling, it brought in former Google executive Marissa Mayer as the new CEO. Those that took a risk on the stock benefitted as Yahoo stock went up 73% in Mayer’s first year. The investors that bought Yahoo stock when Mayer took over are no different than your friend drafting LeSean McCoy or DeSean Jackson and betting on Chip Kelly revitalizing the Eagles’ offense. You can also take risks on IPOs (initial public offerings) which are usually at a manageable price and can offer big returns if the company succeeds. This is akin to drafting rookies in fantasy football. People who took out fliers on rookies like Alfred Morris and Doug Martin last year hit it big as both became some of the top fantasy running backs for the year.
Both activities also stress the importance of diversification. With a stock portfolio, it is important to invest in different industries and different types of stocks. Investing strictly in cloud computing companies can work, but if the whole industry takes a hit, it can hurt your portfolio. It is beneficial to have investments in cloud computing companies, retail chains, manufacturers and health care companies, for example, so you don’t put all your eggs in one basket. Your fantasy team needs this same kind of balance as having only strong running backs won’t win you any games.
But perhaps the greatest lesson from the stock exchange or fantasy football is the idea of value. Some stocks or players may have great potential, but just aren’t worth the price or draft pick. You never want to buy in too high only to be disappointed. Though it has since rebounded, people who bought into Facebook at its IPO price of $38 were burned when the stock tanked. At $38, the price was too steep for a new public company, but when the price dropped, it had more potential and value. Taking Jimmy Graham in the first round can be a little steep, but if he drops to the fourth, the ratio of risk to reward becomes much more favorable.
While each has its own particular complexities, there are valuable lessons to be learned from fantasy football that can be applied to investing and vice-versa. If you consider the core skills and kind of research that is necessary, the stock market might as well be one massive fantasy football league.