Finding the Next Tom Brady for your Portfolio

We can’t tell you how excited we are for the kickoff of the NFL season tonight! For number crunchers like ourselves, it’s not just the diving catches, bone crushing hits, the beer, or the love the game that entices us… it’s the statistics… it’s dreaming of picking a diamond in the rough in our fantasy league… and of course the trash talking.

Which leads us to this little gem of a picture floating around the internet of late…

Tom Brady 2000 NFL Draft
Photo Courtesy: Boston.com

Yes, that’s none other than 8x Pro-bowler, 2x MVP, 3x SuperBowl winner, and supermodel dating (marrying?) Tom Brady of the New England Patriots. Who in their right mind would have thought Brady could have achieved even half of those accomplishments given his less than stellar physical appearance coming out of college. Even the Patriots weren’t quite that sure, waiting til the 6th round to draft Brady.

Now, we’re Bears fans around here, but it’s easy enough to draw parallels with investing from this not so glamorous picture of Brady at the 2000 NFL Combine (where they scout talent like diners at Chicago’s famous Gibson’s steakhouse pore over the cuts of meat before ordering). Ugly charts (investing’s combine picture corollary) are everywhere…. Some classic examples would include say, this stock losing -70% over 3 years.

Apple 1980sChart Courtesy: Google
(Disclaimer: Past performance is not necessarily indicative to future results)

That would be wunderstock Apple in the early 80’s, about 14,000% ago.

Or this stock falling about -65% and looking like anything but a powerhouse.

McDonalds 2000'sChart Courtesy: Google
(Disclaimer: Past performance is not necessarily indicative to future results)

That just happens to be a little company called McDonald’s a mere 10+ years ($75 billion in market cap) ago. No, we haven’t lost our minds and switched to recommending stocks (Apple would be a sell, McDonald’s a buy if we were in that business) instead of managed futures.

The point is that classic bit of lifelong advice – you can’t judge a book by its cover. Looking at NFL prospects at the combine is like looking at investments early in their history or over just a few years. All you are seeing is a quick snapshot that may or may not look anything like what you’re going to get over the next three years, or five or ten years for that matter. While it only seems natural to want to pick the biggest, strongest, fastest players who come from the most successful programs in the football world; and the smartest, most polished, best performing managers in the investment world – there is a very long list of former All Stars who are now out of the game both in the football and investing world.

The better method of picking talent, in our books, is to look past the most visible signs such as last year’s performance and the like (40yd dash and bench press at the combine), and instead try and judge talent where it matters more – say in risk adjusted performance, or performance over a minimum acceptable return adjusted for risk, or best worst periods, and so on. In football terms, can you run a pattern fast and catch the ball, not just run fast…

When investing based on process, not results – you can end up with a Tom Brady. When you’re just chasing results, you’re more likely to end up with Jamarcus Russel or Ryan Leaf, and left wondering where you went wrong with the sure fire pick of the experts (CNBC talking heads).  When doing contrarian investing, buying drawdowns like the one most managed futures programs are in right now – you can end up with a Tom Brady (of course, you can also end up with a Ricky Stanzi).

 

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