With professional football under way and baseball’s regular season nearing completion, countless individuals are now actively managing fantasy sports teams, as well as stock portfolios. Fantasy sports and investing share many of the same characteristics and thought processes, and it may be beneficial for investors to participate in a fantasy league in order to gain a new prospective on managing their portfolios. Fantasy sports is a relatively new phenomenon, and thus, is mostly played by younger generations. Older individuals, like legendary investor Warren Buffett of Berkshire Hathaway (BRKB), have mentioned that the skills needed to play and succeed in bridge and poker can be related to stock investing. Either way, the mind set needed to succeed in the stock market can be obtained and honed through other disciplines.
A fantasy sports season and an equity portfolio both begin similarly--with a draft. For investors, the process starts with all of the equities available. For fantasy, every professional player on every team’s roster is the starting point. For this exercise, since a great number of these fantasy drafts recently occurred, we will use the National Football League for comparison purposes. Now, participants will have to materially shorten these lists. For stocks, depending on an individual’s investment strategy and risk profile, he or she must decide, with the help of past performance, current ratios, as well as future expectations, which equities are worth additional research (a discussion of which ratios and statistics go beyond the scope of this article). For fantasy sports, a manager must also take into account past performances and future expectations in order to evaluate each running back, wide receiver, and kicker, among other positions.
Next, investors and fantasy sports managers alike must rank each equity and player. In order to build a well-diversified portfolio, with the use of financial information and statistics, an investor must directly compare stocks to their industry peers, and select the equity that best fits their investment strategy. For instance, if the investor is interested in taking a position in a technology issue, a choice between Google (GOOG) and Apple (AAPL) may be necessary. This process will have to be repeated multiple times, across a number of industries, until the investor is satisfied with the new portfolio. As for fantasy sports, a very similar process occurs. The participant must rank each player compared to his peers and decide which athlete, at a particular position, will likely perform best during the course of the season. Who will throw for more touchdowns, Drew Brees or Peyton Manning? After both drafts are complete, the investor possesses a portfolio of stocks, while the fantasy sports manager has a collection of players. Now, the “season” begins.
Once an investor’s portfolio is created and a manager’s team is selected, the value of the equities and players involved will fluctuate in much the same manner. The release of company earnings, merger rumors, and other news cause the stock price to fluctuate. The results of Sunday’s games, injury updates, and trade grumblings all affect a player’s value. The investor and team manager must digest these bits of information and decide if a change needs to be made.
Over time or during the course of the season, the portfolio and team manager will get a better feel for their rosters and face some material decisions. Due to a large share price gain, the investor may feel that it is time to take profits on a particular stock, while the fantasy team manager might want to trade a player who appears to be overperforming, in order to receive an athlete back whose best days may be approaching. In addition, maybe it is time to accept the fact that one of your selections was a mistake and drop a stock or player that has consistently disappointed. These choices, along with the search for adequate replacements, are essential for success and very similar for an investor and team manager.
At the end of the season or investment time frame, comparing results with other teams or benchmark indices can be very helpful. If the team ended up near the bottom of the standings, figuring out what went wrong can help a manager avoid the same mistake next season. Maybe the manager assumed too much risk by drafting several injury-prone players who missed a good chunk of the season. As for the portfolio manager, the same reflection is necessary. If the portfolio underperformed the S&P 500, maybe the investor needs to adjust the holdings and concentrate on companies in different industries or stocks with more exciting growth prospects. If the team or portfolio performed relatively well, then the manager should attempt to identify the positive qualities of the portfolio, and attempt to duplicate the performance in the future.
The similarities between fantasy sports and investing are vast. Investors can try out time-tested strategies, such as selecting veteran, blue chip players that can be compared to Dow stocks, or devise new investment approaches, like choosing multiple players on the same team, akin to purchasing several stocks in the same industry. An individual can learn much from the performance of each strategy. In addition, and this is particularly true for younger individuals, fantasy sports is a good first step toward stock investing. Younger generations, for the most part, lack the funds needed to purchase stocks but can easily set up free fantasy leagues. Participation in such an activity can plant the seeds for eventual investments, as the individual may be able to learn and put into practice specific strategies, as well as develop the abilities to understand, evaluate, and act on new information.