19 Mar

NFL Football…And How to Get Off the Horse

March 19, 2012

I cannot imagine that it is easy to decide which major headline or story should be published on any particular day. After all, articles on oil speculation, Apple’s new-look iPad, and the next landing spot for Peyton Manning all seemed to tickle my fancy during my personal media review today. Out of these three topics, I was particularly intrigued by Peyton Manning’s next destination because of my significant interest in professional football. I happened to be in my car during the Indianapolis Colts press conference and heard both Jim Irsay (Colts owner) and Manning (Colts ex-quarterback) describe their emotional journey and what career future lies ahead. Because I am a Chicago Bears fan, I may be somewhat jaded by the emotional aspect of this sports “divorce,” but I had a hard time not thinking about the business behind the decision.

From a business standpoint, this separation makes complete sense. In investing terms, Irsay made a financial decision to sell at a high point and buy a new quarterback position at a low point. Additionally, by avoiding a $30 million bill due to Manning, he has allowed the Colts to diversify their cap space across a young rookie quarterback and other complementary players. As emotional as he was, I have to imagine that the financial burden has been lifted. With Manning, he would be placing a very expensive bet on an aging quarterback with injury issues. By saying goodbye (albeit with difficulty), he has improved the financial comfort of the entire franchise.

Similarly, as investors, we need to avoid confusing emotional with financial decisions. Market timing (attempting to buy/sell at a perfect opportunity) can be the single largest mistake an investor can make. The Dalbar Quantitative Analysis of Investor Behavior (2011) describes the impact of this perfectly. For example, the S&P 500 Index produced an annualized rate of return of 9.1% over a twenty year period ending 12/31/10. The actual “realized” return for a stock investor over the same time period was only 3.8%. The difference between the two (5.3%) is the direct result of poor market timing decisions. In dollar terms, an investor who deposited $100,000 on 12/31/90 and made bad timing decisions throughout the period, missed out on $360,000 of total return.

Having said all of this, I will not claim to know how to run a multi-million dollar NFL organization, but selling high and buying low has always proved to be a profitable venture. Can Peyton Manning resurrect his career and continue to perform at a high level? I suppose we will all know by this time next year. We will also know whether or not Jim Irsay sold his investment at its peak. Either way, we should all follow Irsay’s investment philosophy of paying for future performance rather than historical results.

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