|Credit: Idea go|
When I sit at my desk in the fall and should be thinking about investing, I occasionally have my thoughts wander to football and fantasy football. A few glorious Saturdays ago at a splendid tailgate I came up with the notion that instead of fighting my fall thoughts it might be fun to combine them and see what fantasy football can teach us about investing. Maybe it was that 7-layer dip, or maybe it was my Dixie Cup “talking,” but the more I’ve thought about it, the more I think there are some simple investing lessons buried in the fantasy football world:
- Diversify- In one of the leagues I’m in, I walked away from the draft with an unusually high number of Green Bay Packers. It wasn’t my plan, it just kind of happened that way. Aaron Rodgers, Randall Cobb, Mason Crosby, and the Green Bay defense aren’t too shabby, but they are all from one team. My fantasy team seems to do well when Green Bay does well, and it stinks when Green Bay stinks. When Green Bay had their bye week, do you think that was fun? No, my fantasy team was a wreck. This could happen to your investment portfolio, too! If most of your investments are in one stock, one industry, or even one mutual fund, you can lose a lot when your investments don’t perform well, just like I lose a lot when the Green Bay Packers don’t perform well. Had I sprinkled in a few more 49ers, Falcons, and Steelers who didn’t have Week 10 byes in my fantasy football portfolio, I could have avoided relying on the Green Bay Packers every week, and skipped my Week 10 bye problem entirely.
- Long-Term Strategy- If you are in a “keeper league,” you already know where I’m headed. Most fantasy leagues have completely new drafts every year where every manager starts from scratch, but some leagues allow you to keep a certain number of players from the previous year. If you know you are going to have the opportunity to keep some of your players, deciding between drafting Peyton Manning (who is nearing the sunset of his career) and drafting Robert Griffin, III (who could be around for the next fifteen years) becomes a little bit more difficult of a decision. In a “keeper league,” you probably should lean more favorably toward the up-and-coming players with potential and a high probability of future growth. The stock market is also a keeper league, as you don’t get to start fresh every time you invest and your previous gains and losses go with you. Therefore, in the stock market you need to think long term and focus on earnings potential and future cash flows - not how the stock will briefly overreact to tomorrow’s earnings announcement.
- Buy Low, Sell High- Take my team for example: had I traded away Tony Romo after his Week 1 307 pass yards and 3 TDs performance for Alfred Morris, Washington’s little-known running back at the time who has been lighting it up lately, I would have bought low and sold high. Everyone in my league would have thought I was crazy then, but my team would be better now as we speak. It’s almost counter-intuitive to buy low and sell high, but that’s how you win fantasy leagues, and come to think of it, make money investing. When do you want to purchase a stock? When it’s very cheap or low. When do you want to sell a stock? When it’s high or overpriced. This sounds easy, but it’s very hard to do. Did you naturally want to buy Bank of America at $3 and sell Apple at $700? I rest my case.
- Active Management- Let me go on the record for all fantasy sports enthusiasts out there and express my displeasure with those of you who draft your team and don’t keep up with it. You sadden me. You don’t have any idea when your fantasy team does well, and you don’t have any idea when your fantasy team gets crushed. There is nothing more frustrating than losing to someone who has not updated his or her team, but I can honestly say I’ve never been in a league where, by the end of the year, someone who had not managed his or her team took home the trophy. I believe the same holds true for investing. You, or at least your financial advisor, need to pay attention to what’s going on in your investment portfolio, or the risk of terrible losses is huge. Passively letting your investment portfolio (or drafted fantasy team) roll on its own can work for a while (cough, cough, team I beat in the playoffs last year), but I’m a firm believer that, eventually, active management will win.
For those of you who play fantasy sports, I hope you got something out of this. For those of you who think fantasy sports are for geeks or crazed sport fanatics, you’re right, but you’re also missing out on the fun. Either way, I believe diversifying, having a long-term strategy, buying low and selling high, and actively managing your investments add up to a simple recipe for success for your fantasy and financial portfolios.
And, as I always tell my friends, [insert your favorite team here] before fantasy. Go Falcons!