I love sports. I suspect many of you do as well. I enjoy watching, reading, and talking sports.
In sports, you can’t win without good players. And every professional sports team has a general manager (GM) who drafts and signs players to help the team win. Many fans dream about being an NFL or MLB general manager. Because of this, fantasy football is very popular, where ordinary fans can become “owners” and create their own dream teams. We take our fantasy teams and compete against friends and family in fantasy “leagues”.
But being an NFL GM is not easy. Every move you make is scrutinized by the media, the owners, and the fans. Many NFL GM’s get fired every year for poor performance. Some of it is due to poor personnel decisions, but some of it is due to bad luck.
Picking stocks is kind of like being an NFL GM. Evaluating and buying stocks gives a similar excitement as picking players for your fantasy football team. It’s no wonder that most investors will put some of their portfolio into individual stocks. Even seasoned investors who put most of their portfolio in low-cost index funds will often allocate a small portion (<5%) of their nest egg to individual stocks as a “play” account.
Let’s see how picking stocks is like being in NFL or MLB GM.
1. Picking stocks / players is fun
There is an allure to picking your own stocks. People enjoy the thrill of making successful trades, both in the stock market and in fantasy football. I’m sure anyone who has played fantasy football has told their friends about an amazing draft pick or trade they made. Similarly, it is common water cooler conversation to talk about successful trades.
2. Easy to get emotionally attached to certain investments / players
NFL fans, and sometimes general managers, can get attached to certain players. Maybe they are attracted by their personal story, past performance, or 40-yard dash time. Similarly, traders or investors can become attached to certain stocks, either because they personally use their products, or because of their past performance.
3. Late-round draft picks are like picking cheap stocks
The central principle in stock trading is to buy low and sell high. That’s exactly what sports GMs try to do. Especially in baseball, GMs will draft young players out of college or high school and develop them in the minor leagues (buying low). Once they become superstars, they can trade them to other teams for elite players (sell high).
Similarly, in the late rounds of a fantasy sports draft, the best strategy is to pick players who may not be popular with most owners, but have a lot of upside potential. In investing, this is like picking value stocks. Many investors such as Warren Buffett have done very well purchasing stocks that were not popular with other investors. Value investors are able to make money when the undervalued stocks they buy rise in value.
4. Past performance is not indicative of future results
When drafting players, you need to look at their future prospects, not their past performance. An aging player who was a superstar in his prime a few years ago is not a valuable asset to your team. Similarly, a stock is valued based on its future earning potential, not its past business performance.
5. Luck plays a huge part of your success
In sports, no matter how well you pick players, luck will often determine whether you succeed or fail. The players still have to play, and one bad bounce or one bad officiating call can be the difference between winning and losing the championship. As I wrote in this article, your investment returns are largely out of your control. Over the past 100 years, the stock market has given investors a wide range of long-term returns, and this difference can be worth millions of dollars in retirement income for physicians.
The Big Difference Between Investing And Sports
In sports, you’re trying to win championships. No one plays sports just to be .500, or just to make the playoffs. Everyone plays for the championship. Everyone wants that championship ring.
In investing, you don’t need to win the championship. Doing average is good. Your goal is not necessarily to end up with the most money in retirement, but rather to maximize the chance that you achieve your financial goals. By chasing big returns, you put yourself at risk for big losses. By planning and saving appropriately, physicians do not need to get Warren Buffett-like returns to live a comfortable lifestyle and have a secure retirement. Just getting average returns will get you where you need to be. And by investing in low-cost index funds and getting “average” returns, you end up doing better than the vast majority of your peers who invest in high-cost actively managed funds.
What do you think? Do you have a fantasy football team? What other parallels are there between sports and investing?