Fantasy Sports and the Stock Market

Editor’s Note: This is a guest post from Joe Abello.

The U.S. economy is lagging worse than reruns of The English Patient. While the banking and real estate industries have their investors in tears, oil and gas investors are sporting Tony Robbins-sized grins, puffing on a $50 Cohiba as their yacht pulls into the harbor. What’s my point, you ask? They were opportunists, seizing opportunities when others looked the other way. When asked what his investment strategy is, Warren Buffet—worth a reported $62 billion—explained that he “simply attempts to be fearful when others are greedy and to be greedy only when others are fearful.” The market will eventually rebound, that’s the beauty of capitalism. In today’s bearish market, there’s no better time to sin than now.

If you’re already investing in the market, congratulations, let me get you a cookie. However, for the rest of you, you’re either extremely conservative or just gun-shy about putting your money into something you don’t fully understand—the stock market. Let’s face it, if you knew as much about the stock market as you do about the various fantasy sports draft strategies or salary caps, things would be different, right? Well you’re in luck, because it turns out that fantasy sports actually represent an experimental market, so knowing how to run a team makes you capable of running your own stock portfolio. I know, you’re excited, but settle down a bit so that we can learn some basic concepts to get you on your way to stock market riches.

Let’s start with the “big picture.” The fantasy league represents the market, team owners are the investors, and the players are the stocks. Write it down. Still with me? Good. Now let’s get an introduction to the meat of this sandwich—relevant financial theories.

Supply and Demand: Naturally, fantasy owners want players that will potentially score the most points for their teams. When several owners covet the same player, his value to the market increases. Similarly, capitalism is driven by supply and demand. If a bunch of people decide to buy stock in The Belly Button Lint Company, its price will go up. Since every owner with the 1st pick in your draft wants Kevin Garnett or LaDainian Tomlinson, their derived value is much higher than Chris Kaman or Najeh Davenport. Knowing that you can’t afford to own every blue-chip investment, you research and analyze teams with the hope of finding some “sleepers,” or undervalued players who will outperform their market value. That’s what the stock market is full of right now, a giant pool of “sleepers.” A little risky, yes, but bigger risks yield bigger rewards. If you spend a first round pick on Steven Jackson, his high scoring potential outweighs the likelihood that he’ll get injured and be worthless to your team. Tech stocks are similarly volatile and highly risky. Choose wisely and you will reap the benefits (Google’s IPO opened at $85 per share in 2004, it’s now trading upwards of $500 per share), do the opposite and you’ll be stuck with the Lucents and Pets.coms of the world (remember that heinous sock puppet?!).

Market Efficiency: The differences between the stock market and fantasy sports provide great learning opportunities, too. Insider trading is illegal, but it keeps the stock market honest and efficient. What exactly is an efficient market, you ask? Well, it’s when everyone makes investment decisions based on the same public knowledge that Bob next door has. When you don’t play by the rules, like Martha Stewart and various other infamously corrupt former company executives, you go to jail. On the other hand, insider knowledge in fantasy sports gives you an incredible advantage over your competition. If you have private knowledge of a player’s injury, field and weather conditions, or in the case of the NBA, crooked referees, you increase your odds of success. While this isn’t an efficient market, it’ll still help you understand the stock market and keep the SEC from knocking at your door.

These are just a few examples of how you probably already know all you need to know about investing in the stock market, you just didn’t realize it. Granted, there are dozens of other theories and concepts that apply—diversifying your portfolio, insuring your “studs,” and buy-low/sell-high to name a few—so feel free to leave a comment if you’d like to discuss further. I may not be a true stock market guru, but I have won a few fantasy leagues in my day.

photography by rednuht