With this weekend’s NFL draft in full swing, there’s a good chance that I may spend over 10 hours in front of the TV getting various tidbits and nuggets of analysis about hundreds of football players that I may or may not ever hear of again. Ever since I was old enough to understand the draft, I’ve been fascinated by it. Being a huge fan, and probably a glutton for punishment, I’m the type that will watch the whole draft every year. I love watching all the video clips and hearing the rapid-fire breakdowns of their positives and negatives. Maybe I’m just delirious from all the time in front of the TV, but I’ve started to see a lot of commonalities in the lessons of the NFL draft and the lessons of managing your financial portfolio. Here are 10 things the NFL draft can teach you about money:
1 - Trading up is costly
Falling in the love with that certain player (or in our case purchase or investment) can lead you to give up a lot extra just to have it. Those that are able to make the best picks staying where they are usually do the best in the long-term. If you do decide to “trade up” financially, make sure you truly do your analysis to see if you’ll end up getting the return on your investment that you think you will.
2 - Trading down can be beneficial
There are times when a certain draft position may not be a great fit either financially or because of the personnel available or both. In those times it can be very beneficial to trade down and acquire more picks. With money, this can also be an advantageous situation. By trading something of a perceived higher value for multiple items of a perceived lower value can provide you an opportunity to invest in more, and possibly have a greater diversification of your assets that provide a lower risk of failure.
3 - The sexy picks are the most risky
Fans always want their teams to draft the skill players. Quarterbacks, running backs, and wide receivers gain all the attention and make all the fans happy at draft time. The problem is that those positions are some of the hardest to analyze. Being that they command some of the highest dollars and the rate of success is low, they’re some of the riskiest investments a NFL team can make. With money the same rule can apply, the sexy investments are usually the ones that contain the most risk, and you can be more likely to achieve success going with something more conservative the majority of the time.
4 - Some of the best investments come in later rounds
When it comes to the draft, most fans focus on the 1st round. The big names and contracts come out of the first round, and that’s where you’ll see teams get scrutinized the most for their choices. In reality, a lot of a team’s core players come from later rounds. Being able to find quality deals and investments that are less publicized and off the radar is a key component to building your financial portfolio.
5 - Don’t reach for a need, pick the best available
Teams often make surprise picks based on their team needs. Instead of picking the best available players at positions they feel they’re strong at, they may pick an inferior player just because he plays a position of need for them. A lot of times this leads to mistakes and disappointment. You never know what will come in the future, and you should always focus on the highest quality you can get, regardless of what you think you need at the moment.
6 - Protection is almost always a good pick
In the NFL draft, offensive linemen are some of the safest picks in the 1st round. The rate of success of for those players is higher, even if it won’t make the type of headlines that a skill player would. When it comes to your finances, investing in some protection is usually always a winning decision. Whether you decide on some added insurance or just beefing up your savings, protecting yourself is always a smart move.
7 - Consider the upside
Being able to find that diamond in the rough means that you have to be able to analyze and estimate their potential. How you way that potential reward with the risk has a lot to do with how risk averse you are. There are some that will go for the raw projects and don’t mind the occasional bust. Others want safer picks, even if it means that they won’t ever be superstars. They’d rather know that they will at least be marginal players. This is called the ceilings or floors debate. The question is whether you focus on high ceilings or limiting how low your floors are. The best answer probably lies somewhere in between. I think the majority of the time you want to limit your risk, while taking the occasional chance on something big. That way you don’t lose out on a potential windfall while continuing to steadily grow your assets.
8 - Beware of workout warriors
In the NFL draft, there’s always a few players that end up having great numbers at the combine, even though they really didn’t produce that well in college. Every year teams get enamored with these “workout warriors” and take them higher in the draft than they probably should go. The same rule can apply to your investments. Don’t discount an investment that has been a known performer for the next hot flash in the pan.
9 - It takes 3 years to truly grade a draft
For all the criticism and analysis that goes on during the draft (and in the days following), you really can’t grade the success of a draft for about 3 years. That’s when you can assess your picks performance, and allow for some learning curve. It also signifies a checkpoint where most players are over halfway through their first contracts. The same should hold true to your financial endeavors. Give them some time to mature before you decide to scrap them and move on. A little patience goes a long way, and constantly jumping from thing to thing only means you’ll probably never stick with anything long enough to see success.
10 - Sometimes you have to just trust the intangibles
There are times when a team will go against all conventional wisdom and pick a player just because they love his intangibles. These team believe that success is determined more by the heart and smarts of a player than the physical gifts they possess, which sometimes ends up being true. The same principles can apply to your finances, as there are things that may not seem to be smart decisions that you’ll want to make anyway. Sometimes you are emotionally attached to an investment in a way that you just “believe” in it. This can be a dangerous way of thinking and can lead to making decisions based on things that are hard to justify. But in the end, following our gut is sometimes the best way to go and you can find yourself trusting your instincts regardless of the doubts that others have.
In the end, teams that participate in the NFL draft every year to build their teams are just like all of us trying to build our financial wealth. We spend a lot of time analyzing, trying to gather all the information we can, and hope that it all plays out the way we envision it. The majority of the time it won’t, and those that are truly able to achieve long term success are the ones that can adjust and make the best of the opportunities that are presented to them.
So how did your team do over the weekend?
April 28th, 2008 at 6:55 am
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April 28th, 2008 at 10:43 am
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May 1st, 2008 at 5:57 pm
[…] personal finance, I found an excellent post I wanted to point out. It’s KnowtheLedge’s 10 Things The NFL Draft Can Teach You About Money. Maybe it’s because I love football and the draft intrigues me, but I thought the points made […]