How the NFL Draft is Like the Stock Market

Every April, 254 amateur college football athletes realize their dream and are selected by an NFL team in
the NFL Draft. Many NFL executives put their reputation and their job on the line based on the
selections they make in the NFL draft. As with the stock market, NFL executives must make decisions
based on the value of the player, ensuring they have a process for selecting a pick and balancing what
they have with what they need.

Assessing Value:

With seven rounds in the draft and a finite amount of draft capital, it is imperative that teams have a
general idea of the value of a player. In the NFL draft, the value of a player is determined by when NFL
teams think that player will go. In 2019, the Giants had two first rounds picks; one at six and one at 17.
They took Daniel Jones at pick six when the rest of the league thought he could have been picked at 17
or even later. This is an example of a team not properly gauging the value of the draft which in turn
reduced the returns on their draft capital.

As with the stock market, understanding the value of a stock is important to the success of the portfolio.
Often, people will look to buy a stock after the stock’s showed a dramatic increase. Typically, that is an
example of not properly valuing a stock. While gauging the value of a stock is more challenging than
determining the value of an NFL prospect, there are a few items to consider when evaluating a stock:
industry/market, economic environment, cash flow, historical stock price, business model, etc.

Process:

NFL teams that tend to have more draft success usually have a defined process for how they go about
selecting a player. Bill Parcels famously had a checklist of seven criteria that he would use to evaluate
quarterbacks. While his hit rate was never 100% (whose is), at least he knew what he was looking for
and had a tool that helped him reduce the emotions of selecting a player.

Utilizing a process or checklist when it comes to selecting stocks will help investors reduce errors when it
comes to making their investment choices. Too often, a person will invest in stocks simply because they
like the company or they got a hot stock tip, or they think the company is the “next big thing.” Building
out a process can help remove emotion from selecting a stock and provide more consistent outcomes.

Assess Your Needs:

Every NFL draft there is a debate among pundits on drafting for need vs drafting for value. Should a
team go for a need that they have, or should they select the “best player available?” Often, the pundits
will side with the best player available camp but building out a roster is more nuanced than that. If a
team has three starting quality wide receivers maybe drafting another one with a first round pick isn’t
the best use of resources.

Like the best NFL teams, a portfolio should have balance. While portfolios that only invest in tech
companies may have outperformed over the past few years, there will come a time when the tech
industry is the worst performing sector. Balancing a portfolio between different types of industries and
companies will help mitigate risk and reduce volatility.

Choosing investments in a portfolio don’t usually have the same ramifications of picking million-dollar
athletes, but it’s still an important process. Building a suitable portfolio can positively impact a
retirement.

Disclosure: There is no guarantee that a diversified portfolio will enhance overall returns or outperform a
non-diversified portfolio. Diversification does not protect against market risk.