Investing Lessons From Football

When Sam Hinkie stepped down as General Manager of the Philadelphia 76ers, he wrote a resignation letter in the same way some great investors like Buffett and Klarman write annual letters. In fact, wrote Hinkie, those investors letters were some of the things he enjoyed reading most.

In both investing and sports, the ‘managers’ are trying to invest in assets undervalued by the market and that will develop in such a way as to satisfy their goal. Sports is a more difficult field because it’s a zero sum game, there can be only one winner.

Choose good data, not available data.

Lombardi said that when he worked for Al Davis at the Raiders the most important piece of data was the forty-yard dash time. That worked for some players, but not all of them. Lombardi explained that some players run faster than you’d think once they put pads on. Forty-yard dash times also don’t count a player’s character, teamwork, or grip — all relevant factors.

That’s why at Stocknews.com we are going much deeper than you normally see from stock news-focused sites and beyond the “available data” you can find in most places. The stock price, much like the forty time, is easy and available to everyone else. But that only means one needs to dig deeper and with our numerous data points, there is no shortage of finding the good and the bad in a stock.

Accommodating new information and updating beliefs.

Another misstep, says Lombardi, is the manager who drafts a player that was a ‘one-year wonder’ and expects them to continue to grow in the same way. Rather than ask, ‘How great can this player be?’ a better question is ‘Why hasn’t this player always been good?’.

In his work studying who makes good predictions, Philip Tetlock concluded that the best forecasters don’t overreact to new information. Rather, they start with the base rate (what typically happens) and make adjustments. NFL Quarterbacks that only start one-year do not have a good track record.

After a quarter of earnings growth investors can ask the same question, ‘Why hasn’t this company always been great?’. Sometimes there will be good reasons. If you look at the Ferrari (RACE) history you can see the story for why the company has had a good first half of 2017. Capital allocators and sports managers have to solve this puzzle. Is this a ‘one-year wonder’ or not?

Watch out who you compare to who.

It’s easy to say that a player is the next Tom Brady just like it’s easy to say that a company is the next Apple. We tell ourselves these stories because they are easy. We get to jump to the happy ending without the hard stuff in the middle. Good investors will avoid these comparisons because they lead to lazy decision making.

Al Davis at the Raiders compared every draftee to someone who had been an all-star. This association led to biased conclusions. Daryl Morey of the NBA Houston Rockets thought this was such a problem he forbade cross-race comparisons. If you thought a player was like someone else, you had to find a someone else that wasn’t the same race. The most egregious example of this is the story of Theranos, whose CEO was supposedly “the next Steve Jobs.” After multiple high-profile scandals, Theranos barely exists anymore and its disgraced CEO will likely never serve in a high-profile role ever again.