MILLIONS OF AMERICANS SPEND THEIR TIME, much of it while they should be working, participating in fantasy football leagues. On the surface, fantasy football appears to be a harmless distraction from everyday life and a fun way to enjoy football while competing against your friends and co-workers. After a more in-depth look at the structure of the game itself, you can see that there is much to learn about investing from this game.

For the few people who do not know what fantasy football is, usually between 10-12 individuals make up a league in which each person is a team owner. A draft is then conducted in which each owner makes up his or her team out of real National Football League players. There are certain positions that must be filled on each roster, and then several players are relegated to the team’s bench. The scoring, which is assigned to several statistical categories, reflects the actual performance of the players on the field each week.

For some people who play fantasy football, it can be almost as important to them as managing an investment portfolio is for others. Because of this, many strategies and thought processes that govern the way people invest can and should be used when putting together a winning team. Each NFL player that you could have on your team has an initial price. This price is not in terms of dollars as it is in investing, but rather in the form of opportunity cost.

When you are drafting a fantasy team, just as when you first assemble your portfolio, you want to maximize the value you are getting. If you want a particular player on your team, you wouldn’t draft him until you have to, just like you wouldn’t buy a stock until the price was right For example, if you think Detroit Lions quarterback Jon Kitna is going to have a good year, that doesn’t mean you should take him right away. If you draft a player like Kitna in the fourth round when you can get him in the seventh or eighth, then you are not maximizing his value. You are overpaying for a commodity that you could have acquired at a later date. This idea is paramount when it comes to investing.

Another important aspect of managing a portfolio or a fantasy team is to make sure you stay as active and attentive to the league or markets as possible.

If you think of your fantasy team like a portfolio and your players as if they are your investments, you want to make sure you know as much as possible about what you own. Do you have a player who is injury prone? That is like owning a stock from a volatile market. You’re going to want to have an insurance policy in place in case something unforeseen and damaging does happen. An example of this would be having a player like Minnesota Vikings running back Adrian Peterson. At some point, he could easily be injured and unusable, so you’d want to have a backup plan, just in case. The strategy you would use in fantasy football, known as handcuffing, would be to make sure you have his backup, Chester Taylor, on your team.

If something happened to your investment in Peterson, Taylor’s value would increase and the damage you experienced would be minimized. If you have an investment that is good only when the economy is strong, you’ll want to hedge your bets by owning something that benefits when things are slow.

A crucial part of managing any successful portfolio is diversifying your investments. This is just another way to reduce the amount of risk you expose yourself to. Even if you have several investments in a segment of the market that seems to be very strong right now, something unforeseen could shatter your entire plan. You want to do this when managing your fantasy team, as well.

For example, the Cleveland Browns have had one of the best offenses in the NFL this year. Their main offensive players, quarterback Derek Anderson, wide receiver Braylon Edwards, tight end Kellen Winslow Jr. and running back Jamal Lewis have all had good years and are near the top of the League for their positions. These are all guys you’d want on your team, but not necessarily all at the same time. Normally, you could expect a lot of points from this group of players, but if Derek Anderson had one bad game, it could affect the rest of the team. If your quarterback threw no touchdowns in a game, that would also mean that your wide receiver and tight end would be scoreless. The bad play from the quarterback would likely mean that the entire offense was struggling, leading to a poor performance from your running back, as well. If you replaced some of these players with players of similar value from different teams, your team would be more consistent and less of a risk.

Every middle school student who’s ever had an introduction to investing knows the concept of buying low and selling high. These same kids also employ this thinking while playing fantasy football with their classmates. If you have a stock or player that has performed better than you anticipated, you need to determine why and decide how long it will last. The reason could be that something has fundamentally improved, or it could be some sort of anomaly that is making something appear more valuable than it really is.

A good example of this in fantasy football is Tennessee Titans running back LenDale White. Coming into this season, White was believed to be a good player, but not a great one. However, between Weeks Seven and Nine of the NFL season, White had three consecutive games in which he rushed for at least 100 yards, a benchmark number for any running back. A savvy player would have enjoyed this surprising production, but also would have noticed that the three defenses White faced in those weeks were some of the worst in the League. His value was sky-high and would probably never reach that level again. He was the perfect player to sell high to another team and get someone in return who is a more proven commodity. White has yet to reach 100 yards in a single game since, and has not even come close.

Just as in investing, though, sometimes it can be hard to part with something you own, even if all the rational thinking suggests that it’s time to let go. If you owned LenDale White, the value he would have to you might be more than he is really worth. This is a dangerous psychological phenomenon that can really hinder someone from making sound decisions about their investments. You were the one who took the chance on this player, and now he has exceeded your expectations. You were there for the down times and are now being rewarded. Even if you think that the peak has been reached and it is now time to cut ties and cash in, your heart is telling you to hold onto what you’ve got. When you give into this kind of decision-making, you are essentially buying high on an investment you already own.

Every season, a few players break through and outperform anyone’s wildest expectations. These are the guys that you can get essentially for free in anticipation of future greatness. This is like investing in small-cap companies. The commitment you need to make is minimal and the return could be infinite. In fantasy football, this would be like picking up Derek Anderson early in the season. He wasn’t even a starter on opening day, and now he is the third best quarterback in the NFL. In reality, it would be like investing in a company such as Starbucks when the coffee giant went public in 1992. Since then, the stock has gone up 54 times its original price. Of course, there is risk in these kinds of investments, but if you make a knowledgeable decision about which horse to back, the payoffs can be great.

Rules to abide by while investing are incredibly important when it comes to managing your money. These guidelines can be used in many other areas of life and can often help someone succeed in everything they do. Limiting exposure to risk, making good judgments of talent, and staying attentive and knowledgeable can win your fantasy football league or set you up financially for the future. Either way, you should be able to prosper and will have a lot to brag about when all is said and done.

Until next time,
Jamie Ellis

December 6, 2007

The Daily Reckoning