The brilliantly-written Epicurean Dealmaker is one of my favorite business blogs, offering consistent insight into the details and psychology of major M&A transactions. Over the weekend, Mr. Dealmaker presented a persuasive argument that the NFL/investment business metaphor was of limited value, and I take his point entirely. There are, however, similarities between equity investing and gambling on football that deserve explication. For this post, I will be
stealing shamelessly borrowing heavily from Michael Mauboussin’s “Decision Making for Investors” which remains, to my mind, the single best report on general investing written since Graham’s Security Analysis.
For our purposes here we will equate bets on individual games as option trades, expiring weekly, and equate equity investments as the pre-season selection of a particular team to make the play-offs (ie beat the market). By far though, the most important element of the exercise is the analogous nature of Vegas odds and valuation levels.
Most portfolio managers will claim to own a “portfolio of high quality companies” and, in the same way, a gambler will be more comfortable with a portfolio of bets on teams like the Patriots and Steelers with good coaching and long-term records of success. The success or failure of these transactions, however, depends much less on quality than the price paid for this attribute. The “options” gambler who took New Orleans last weekend minus 10.5 points is now in a similar position to the investor that paid 50 times forward earnings for Netflix. In the same way, the “equity” investors that got 40-1 for the surprisingly capable San Francisco 49ers in August to make the Super Bowl is sitting on a considerable gain whereas his counterpart with Baltimore, much more of a pre-season favorite now struggling, at 6-1 to make the big game is under water. Investing and gambling success is predicated less on expectations but changes in expectations.
Tim Tebow and the Bandwagon Effect. The destruction of the Broncos at the hands of my beloved Lions over the weekend also implies a number of cautionary elements for investors. It is completely understandable if the sizable Evangelical Christian contingent of football fans feels enough of a vested interest in his success to make the Broncos #15 jersey the top-selling in the country despite his until-recent back-up status. It was also completely predictable that his leading the Broncos back to victory in the fourth quarter two weeks ago had his legions of fans in full froth – leveraged nicely by a significant upsurge in media attention through the week. I haven’t checked*, but I assume that the hype machine, by attracting gambling dollars to the Broncos, did affect the point spread for Sunday’s Lions/Broncos tilt, making a bet on the Broncos more expensive. This options bet expired worthless.
The Tebow rule of investing then entails an increased level of caution when media hype is evident. More subtly, it also implies that investors should be careful when they have a rooting interest and are liable to see what they want to see, ignoring potential problems. That the Broncos quarterback reflects Christian values that you may share has nothing to do with his success on the field. The fact that you feel an emotional hole in your life at the passing of Steve Jobs does not make Apple stock cheap.
The corollary that occurs immediately here is the cyclically-popular notion of socially-responsible investing. In a perfectly ethical world, a sharp increase in socially-responsible asset pools would have a salutary affect on overall business operations. The problem, however, is that managing large pools of money without restrictions is difficult enough and inevitably, limiting the universe of potential investments by environmental or political criteria results in poor relative performance. My advice to the well-intentioned people advocating political goals through investing (usually small and medium sized company pension funds) has always been the same – don’t restrict yourself initially and use the gains to support any cause you like. Do not, as Josh Brown has pointed out, involve your politics with the market. Or your sports gambling.
There are grounds for stretching the NFL gambling/investing even further. Delusional expectations for the home team may reflect a similar sentiment regarding your current portfolio and conservative running attacks work better in bad weather. I won’t try your patience, however. The point in the end is that whether perusing the sports page or the business section, success with money is more likely if careful attention is placed on the price of admission when climbing on any bandwagon.
Oh, and read the Mauboussin piece. Repeatedly. Trust me on this.
*update: I didn’t have to check. i just remembered this game didn’t have a line due to exogenous factors – Lions QB Matt Stafford’ injury status. We’ll have to assume the spread would have been affected as I mentioned which, ummm, yeah. Bit sloppier than I would have liked. .