4 Ways Fantasy Football is Just Like Investing
Outside of fantasy football, my main hobby is investing. It feels like I spend an equally absurd amount of time reading about that subject as I do fantasy football. Then again, it’s hard to say for sure because it’s easy to lose track of which subject I’m actually reading about since, in most respects, investing and fantasy football are pretty much identical. For example….
No One Can Predict Future Results
The difficulty of predicting what will happen next year is familiar in fantasy circles. Any player can tear an ACL in the preseason and see their season end before it starts. Even predicting what will happen next week is difficult. All it takes is couple of turnovers to not only change the outcome of a game but also the game flow and the fortunes of every fantasy player involved.
While predicting the earnings of individual companies may be somewhat easier than this, predicting what will happen to stock prices —which determine your results as an investor — is no easier. Warren Buffet, the world’s greatest investor, once said, “the only value of stock forecasters is to make fortune tellers look good.” In his most recent shareholder letter, Buffett wrote about bad returns, saying, “No one can tell you when these traumas will occur — not me, … not economists, not the media.”
In football, we’re all familiar with the Skip Bayless types who confidently claim to know what will happen in the next game. Those types exist in the investing world as well. In fact, they’re abundant. Charlie Munger, the business partner of Buffett (and co-inventor of the style of investing for which Buffett is most famous), once said, “There is always a market for people who pretend to know the future.” Ed Seykota, one of the world’s best traders, said to ignore advice from those who say they are on to a sure thing; the ones who actually know what they are doing speak with a lot of “maybes.”
In both investing and football, one of the most important first steps toward being successful is to accept that no one can predict future results and, instead, think in terms of probabilities. Michael Mauboussin, head of global financial strategies at Credit Suisse and a best-selling author, said, “Investing is inherently a probability exercise.” Howard Marks, one of the best bond investors in the world, similarly said, “the best we can do is view the future as a probability distribution and invest accordingly.”
Once you have assessed the odds of different future outcomes, you are in a position to win because….
Winning is About Finding Mispriced Bets
In his book “Fortune’s Formula” about the Kelly Criterion, William Poundstone wrote, “The stock ticker is like a tote board. It gives the public odds. A trader who wants to beat the market must have an edge — a more accurate view of what bets on stocks are really worth.” Munger said the same thing: “You’re looking for a mispriced gamble… That’s value investing.”
In fantasy football, if a player is priced (in terms of ADP) very close to the bottom or top of his range of outcomes, then he is mispriced. As we just discussed, no one can predict the future, but if you buy under-priced players and sell over-priced players, you are putting the odds of winning on the trade firmly in your favor. That general approach applies to both managers of fantasy teams and managers of mutual funds. Meb Faber, a fund manager for Cambria Investment Management, likewise said, “Our job as portfolio managers is to try to put the odds in our favor.”
Richard Dennis, one of the most famous traders of all time, discussed a market situation where he likes to trade and said, “It’s just an odds play. There’s a lot of volatility in the outcome, but you know the odds are in your favor….” Sekyota was hitting on the same theme of volatility in outcomes when he admitted, “Luck plays an enormous role trading success.” In both fantasy football and investing, it’s easy to underestimate the role of luck in the short term. That’s why both subjects share the mantra….
Process Over (Short-Term) Results
With so much randomness in the outcomes, there’s no guarantee that you’ll win on a trade even when the odds are strongly in your favor. If you sell a player that is priced very near his upside, he could still hit his upside, leaving you as the apparent loser in the trade. In investing, Marks wrote, “Return alone — and especially return over short periods of time — says very little about the quality of investment decisions.” Joel Greenblatt, a famous special-situations investor, put it more colorfully by comparing some investing approaches to running through a dynamite factory with a burning match, concluding, “You may live, but you’re still an idiot.”
The high volatility of short-term results means that you cannot judge the quality of a fantasy manager or portfolio manager by their results in the short term. Michael Covel, a best-selling author about trend-following trading, discussed this issue when he asked, “If a money manager has a good track record and a five-star rating, he’s good, right? Not necessarily,” adding that, to really answer this question, “You have to evaluate the process by which that outcome was generated.”
A good process, one that puts the odds always in your favor, will win out eventually, but anything can happen in the short run. That’s why it makes sense, in both fantasy football and investing, to ignore short-term results and focus on improving your process — increasing the edge you have in each trade.
This is easier said than done, though, for both fantasy and portfolio managers. It’s hard to stick with even the best process if it racks up short-term losses. It’s perhaps even harder to give up on a bad process if it has brought success in the past. Hence, the proverb: “To whom the gods want to destroy, they send forty years of success.”
Good Assets Can Be Bad Trades
In fantasy football, it’s easy to think that you are winning a trade if you are getting the best player involved, but it’s just not so. As we discussed above, buying a player priced at (or above!) their upside is a bad trade even if it happens to work out. As another example, in dynasty, if you give up four first round rookie picks for a player other than Odell Beckham, Mike Evans, or David Johnson (and maybe not even those three), it’s a bad trade regardless of how great you think the player is.
The same idea applies to investing. Marks wrote, “a high quality asset can constitute a good or bad buy, and a low quality asset can constitute a good buy or a bad buy.” He reiterated this, writing “Bottom Line: there’s no such thing as a good or bad idea regardless of price!” In fact, Marks has often said that, of all the risks involved in an investment, the biggest risk of all is “price risk:” the risk of paying too much.
George Soros, a famous trader on the opposite end of the investing (and political) spectrum from some of those mentioned above, has hit similar themes. Paraphrasing, he warned that we all have a tendency to focus too much on whether we will be right or wrong and not enough on how much we will win if we are right and how much we will lose if we’re wrong. The latter is purely a function of the price we are paying in the trade. At too high a price, the trade goes from being in our favor to against us.
One thing that tends to increase the price is when a players starts to be seen as a good asset by the majority of fantasy managers. That change will increase the player’s price, and as just described, once the price increases far enough, the odds shift out of our favor. The result is that, as Marks put it, “The very coalescing of popular opinion around an investment idea tends to eliminate its profit potential.” In investing, this situation is sometimes called a crowded trade.
As a result of this process, it is often profitable, in both fantasy football and investing, to go against the majority, to zig when others zag. In fact, you have to worry, if you are on the same side as the majority, that the potential upside has already been baked into the price. In the words of Mark Twain, “Whenever you find yourself on the side of the majority, it’s time to pause and reflect.”
In recent seasons, one way that you could have zigged while others zagged was to use the Zero RB draft strategy. In part two of this article, we’ll talk about some more ways that fantasy football is just like investing, two of which can help us understand whether the strategy can continue to work in the long run.