Playing Smart: Portfolio Lessons from Football’s Best and Worst

Playing Smart: Portfolio Lessons from Football’s Best and Worst

As a longtime New York Jets fan, this year was supposed to at least bring an end to our playoff drought. Our portfolio was robust we boasted—a top-five defense, the reigning offensive rookie of the year, and an overall solid roster. However we were missing one critical component—a competent quarterback. This seemed to change overnight when we traded for Aaron Rodgers. Tragically, our high hopes were shattered just four plays into the season when Rodgers tore his Achilles and was sidelined for the rest of the season.

Now, we’re stuck with Zach Wilson as our quarterback who, to put it plainly, just sucks. He’s the least competent starting QB in the NFL, period. Three games in, and it seems like we’re aiming for a better draft pick rather than eyeing a spot in the playoffs. So, how does this football fiasco relate to the stock market? Today, we’re highlighting a parallel between the Jets’ predicament—losing their star quarterback, and the crucial investing principle of diversification. Both football and investing revolve around the critical concept of balancing various elements and managing risks effectively.

Aaron Rodgers and the Single Asset Reliance

The situation the New York Jets find themselves in paints a clear picture of the risks of putting all your eggs in one basket. Banking heavily on Rodgers to break their playoff drought, the team is now dealing with the repercussions of his injury. This isn’t too different from investing. Leaning too much on a single high-yield asset can expose your portfolio to significant losses, highlighting the necessity for well-rounded asset allocation.

It’s also a perfect time to stress the value of regular research and portfolio review. Even a historically strong stock can plummet due to a myriad of reasons—be it management shifts, emerging competitors, or a dip in innovation. Sure, Aaron Rodgers’ injury was unforeseen and freakish, but given he’s nudging 40—old in NFL terms—the absence of a solid backup QB is glaring and condemnatory.

Zach Wilson as the Under-performing Asset

The Jets’ mishaps offer another lesson in the form of their selection process, and how Wilson became their QB. In their desperate quest for a quarterback after the disappointment of Sam Darnold, The Jets became enamored by Wilson’s so-called “arm talent”. Comparisons to Patrick Mahomes were even foolishly thrown around.

However, Wilson’s flashy skills during the draft process overshadowed numerous warning signs. Including playing at BYU (a smaller school) against less competitive opponents and a one year wonder season which came during the covid-19 period. This scenario is akin to betting big on a stock with historically poor financials that had a stellar year due to an industry bubble. When the bubble bursts, shareholders are left holding the bag.

The truth is, Wilson was always a risky bet. While every draft pick comes with its share of risks, prudent risk management doesn’t mean going all-in on such volatile prospects. It means taking measured, thoughtful stakes, while embracing the possibility of setbacks. Essentially, if Wilson had been a 4th round pick, we could have tolerated the Jets’ gamble and even anticipated his subpar performance. However, being the #2 overall pick, the data and diligence in the decision-making process have to justify such a choice.

Balanced Diversification in Investing and Football:

Balanced diversification is essential, whether you’re managing a football team or an investment portfolio.  While a perfect balance is sometimes unattainable, striking a semblance of equilibrium is crucial to prevent one aspect from dragging down the whole team. Every player’s role should coalesce to drive the team’s overall success.  Similarly, in investing, a balanced portfolio guarantees that no individual asset clouds or jeopardizes the overall health and performance of the entire portfolio.

The goal is to achieve a harmonious blend of assets, each contributing to the portfolio’s robustness and resilience against market volatility, paving the way for consistent growth and stability. Just as in football, where a struggling offense might need the support of the defense, the same holds in investing; when tech stocks plummet, stable performances from other sectors can help maintain the portfolio’s overall health.

The Role of the Quarterback – The Asset King

We understand that the QB is the most important player on the team, and high performing assets play a similar role when it comes to our portfolios. While I’ve advocated for diversification throughout this piece, I must stress that over-diversification, or possessing an excess of stocks (more than 10 in my opinion), could potentially hinder substantial gains from a few crucial contributors.

If you’re looking to own the market broadly, consider acquiring an S&P 500 ETF or index fund, and couple it with a few of your standout assets or “star players.” It’s worth noting that an elite quarterback and puss rusher—akin to the Kansas City Chiefs—can elevate an otherwise average team to a Super Bowl victory. While a stellar defense paired with a subpar quarterback might struggle to compete.

So, how does the Jets’ strategy diverge from this approach? The Jets placed a significant bet on an aging player without devising a substantial backup plan, essentially to mask their prior misjudgment with Zach Wilson. They clung to this under-performing asset and faced with limited alternatives, are now doubling down, potentially purchasing more distressed assets (Jets sign Trevor Siemian) in hopes of salvaging their season.

Remember, investing is as much about strategic asset allocation as it is about timely intervention and course correction, much like managing a football team. Check out my article about investor identity and developing a strategy that works for you

The Wrap Up

The New York Jets’ situation serves as a poignant reminder of the importance of balanced diversification and prudent risk management in any endeavor. Whether managing a football team or an investment portfolio, the principles remain: a well-rounded, diversified approach is key to mitigating risks and ensuring long-term success, and over-reliance on a single element, no matter how promising, can have dire consequences. By internalizing these lessons, we can strive to make more informed decisions both on the football field and in the financial arena.

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