Prediction and Statistics as Explained by Fantasy Football

Football season is upon us yet again and I, for one, could not be happier. For me, the return of the NFL every year is part of such a nice routine: the kids are back in school, fall is around the corner. The weather will start to cool at some point, the holiday season isn’t too far away and, most of all, my weekly ritual of fantasy football is back.

At this point it’s likely you’re somewhat familiar with the concept, but fantasy football allows friends (and foes) to form leagues together and pretend they’re NFL General Managers. The goal is to put together a team of NFL players that will produce better statistics (yards, touchdowns, etc.) than the other teams in your league. For me, the beauty of the game is that you’ll suddenly find interest in a Thursday night blowout between the Jacksonville Jaguars and Tennessee Titans simply because you are hoping for your tight end to get a meaningless touchdown at the end of the game. Conversely this is the same reason that Mickey Abeshaus, MD, CFP®, TCI’s advisor in the Flagstaff office, refuses to ever play. Beauty is in the eye of the beholder, I guess.

At this point you may be asking yourself, “why are you talking about fantasy football on this financial blog, Sam?” I’d be remiss if part of the reason wasn’t an excuse to post pictures of my favorite Kansas City Chiefs players, but I promise I’m going to tie this into a stock market analogy.

Perhaps the greatest part of fantasy football is the beginning of the season draft. This is where all the players are on the table and the entire league gets together to “draft” their team. This process looks pretty similar to the actual NFL draft. Team one picks their player, then team two, and so on back and forth through the draft order until everyone has filled out their roster…or at least that’s what it looks like if you’re an amateur.

The fantasy football players that consider themselves true experts will opt for the “auction draft format.” That is, every team has a set (fake) budget of $200. A player goes up for bid and every team has an option to get that player on their team. The highest bid wins. In other words, the draft becomes a market! See, I told you I’d get to the analogy.

Prices Hold a Lot of Information

Let’s quickly review what prices tell us, regardless of whether you are talking about the stock market or a fantasy football auction draft. Prices reflect two things:

1. All known information
2. Future expectations

For fantasy football, it seems easy to say you’ll just go get the best players in the auction draft format, but the question becomes at what price?

Travis Kelce, pictured above, is the most prolific tight end in the league. It has been a big advantage to have him on your fantasy team in past years. This is the information that is known. What is much harder to know prior to your draft is the expectations of your fellow league mates. If several of them expect Kelce to continue to be a huge advantage this season, then what happens to his price? It’s going to go high. He certainly is a great player, but at some point you may have to pay such a price to have him on your team that you lose the ability to get good players at any other position. Essentially, he’s lost his value by being too expensive.

The stock market works the same way. It’s relatively easy to look at a company’s balance sheet and future prospects and decide that it’s a great COMPANY. However, if a lot of other people are making the same calculation, there’s a good chance that the stock price gets too high to make it a great VALUE.

To be successful in the market, you can:

1. know information others don’t, or
2. have different—and ultimately correct—information about future performance.

Evidence shows us this is very hard to do repeatedly.

For fantasy football, it’s not enough to just know the good players; you need to know the players with good values.

Lying With Statistics

Simply knowing all the past information about a player or company isn’t enough as we’ve just shown. You have to determine what that information means for the future. Unfortunately, we are overly saturated with information when it comes to both fantasy football and the stock market. In other words, tell me your conclusion and I’ll find you the numbers that justify it.

I could tell you that the second-year running back for the Chiefs, Clyde Edwards-Helaire, is due for a huge breakout season. He was still learning the system last year, he commanded less than a 60% snap share, and historically Andy Reid led offenses produce a top ten running back every year on average.

I could also tell you that he ranked 27^th in rushing net expected points, and 24^th in rushing success rate and, thus, maybe just isn’t as talented as he was projected.

Everything above is true, but I can spin it to come to different conclusions.

As far as the stock market is concerned, this is how Jim Cramer makes a living. The man knows more company stats off simple recall than almost anyone else alive, and thus, can present whatever positive or negative case he wants to make on his show. Does that mean he’s good at prediction? I think you know the answer.

How to Position Yourself for Success

At this point you’re probably asking, “So, Sam, if it’s so hard to beat markets, how have you won far more championships than your friends and consistently been at the top in your long running fantasy football league?”

Fantasy football—and markets—are a bit analogous to poker in this sense. A very skilled poker player isn’t trying to win every hand because they know there’s way too much uncertainty and luck involved to do so. What they are doing is tilting the odds in their favor. For fantasy football and markets, this comes in two flavors.

First, know where you are most likely to get value. In fantasy football, this relates to positions. In real football, quarterbacks are by far the most valuable players. Not true in fantasy football and it’s because of scarcity, or the lack of it. In a typical league, there are only ten QBs needed and the difference between the best and tenth best just isn’t that big of a jump typically. However, most leagues need to play 30 running backs and wide receivers. The difference between the top RB and the 30^th best is a much wider gulf. It is far more valuable to focus your attention on those positions which are far more important to your success.

In the markets, this is about asset allocation. Evidence shows us that small stocks, value stocks, and relatively profitable stocks should outperform the broad market over time. Focus your attention there and tilt the odds in your favor.

Second, be patient and flexible. When someone has their eyes set on a particular player in fantasy football, they’re going to have to pay whatever price is set no matter how high. A far superior strategy is to have “tiers” of players you think will be roughly similar. Then, you can see how the auction draft unfolds and take the player in your “tier” that goes for the lowest price. It’s much likelier you end up with more value overall than focusing on specific players.

Same concept for the stock market. Our focus is on broad asset classes—we need exposure to U.S. Large Stocks for part of our portfolio, NOT any one specific stock. There are a few decision points that go into any market purchase:

1. What I want
2. When I want it
3. How much I’ll pay for it

If I have no flexibility on the first two, I’m trapped on number three. If I demand I own Tesla stock and that I need to buy it at a certain time, I’ve given up any negotiating power on price. However, if I have complete flexibility on the first two by focusing on asset class, then I have complete power on price and can be patient to get the right value. The ETF’s and mutual funds that TCI uses takes this second approach.

Confidence in the Future

Tilting the odds in your favor from a long-term standpoint doesn’t always guarantee immediate success. Markets sometimes go down and NFL players get injured and have bad seasons. However, using what we know about markets and staying principled will keep us successful over time.

In the meantime, I’m off this weekend to begin the pursuit of my fifth championship. If history is any guide, my friends should make that relatively easy for me through their pure lack of skill. Good luck to those of you that play in your own pursuit of (fake) glory!