The Capitalist Investor - Episode 73

The NFL Draft is here! Even better, Cleveland is hosting it this year. So we decided this week we’re going to parallel the NFL draft with the stock market. How does drafting the best players in the country compare to picking stocks? Even bigger question—who will the Browns pick? Don’t miss this draft-themed episode!

Outline of This Episode

  • [3:02] Comparing the NFL draft to stocks
  • [3:45] Risk-adjusted returns and draft lineup
  • [4:31] Big-ticket players versus the hidden deal
  • [6:06] What position will the Browns pick?
  • [8:23] Draft for need to find a complementary player
  • [10:05] Sheldon Richardson: working in limited capital
  • [15:40] Joe Thomas = the staple in your portfolio
  • [16:22] Tom Brady [Super Bowl champion extraordinaire)
  • [18:22] Andrew Barry: Analytics and managing risk
  • [20:11] The biggest losses the Browns have taken

Risk-adjusted returns and draft lineup

In stocks, if you’re building the best portfolio possible, it’s not always about how much return you can get. It’s about how much return you can get per unit of risk you’re comfortable with. When you’re drafting someone first overall, it’s a lot of risk and a lot of money. You NEED a high overall return on your investment. But if you’re drafting something 26th, overall it doesn’t need to be a home run pick.

There’s always going to be high-flying stocks. It’s a constant barrage of big names (i.e. Tesla, Apple, etc.). If you’re trading those names, sometimes it’s better to dig deeper and find some names that aren’t high-priced—just like the Browns passed on JJ Watts and got a killer deal on Jadeveon Clowney. Build your roster on good names hiding behind the scenes.

Draft to fill the position you need

The Browns are finally in a position to draft for a need to complement the current roster. It’s the same with stocks—you want a balanced portfolio. You can’t just be a tech team. You need some consumer staples, discretionary, financials, etc. Just like the players in the draft, you get different sectors of the stock market at different values over different times. You aren’t just buying a company or a name—you’re buying the valuation. You don’t want to pick a running back first overall when you don’t have a quarterback. You need to know the backgrounds of the companies but also their valuation.

A lesson on working in limited capital

You could be a really good player—like Sheldon Richardson—and still only make $12 million a year. If NFL teams find a young guy who’s 80% as good but costs 80% less, you’re out. It’s a business. You can still lose your spot to people that you’re better than because they’re cheaper. He was one of the best players on the team, but still got cut. It’s all about working in limited capital. You’ll occasionally have a stock that you’ll trim or sell because you made a lot of money on it. If the valuation gets too high, you sell and reposition it into other companies.

Tom Brady [Super Bowl champion extraordinaire)

Tom Brady was the 199th pick of the 2000 draft. Talk about a diamond in the rough. He’s the greatest quarterback of all time. Moving to Tampa Bay and winning a super bowl his first season there? Insanity. He’s an outlier. Very few aren’t drafted in the 1st round. When you have a well-rounded portfolio with good names, you can afford to take a few more risks (i.e. Bitcoin). A 1–4% position isn’t outlandish anymore. You won’t win on your 6th round pick most of the time. You have to do more research on those names. But when you’re building your portfolio, those pieces should fit together nicely.

We’ve all picked losers. We all take some losses. So do the Browns. What draft picks were we most upset by in the past? Listen to the whole NFL Draft-themed episode to learn more!

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