Draft Picks

With the first pick in the NFL draft…

The kick off for the NFL draft is tonight and the lives of 253 young men will be forever changed. Fame and fortune awaits these newly minted professional athletes.

What are the odds for a college football player to make an NFL roster? According to the NCAA about 1.6% of eligible college athletes will make it to the next level.  During the 2016/2017 college football season there were 73,063 players, of which 16,236 were draft eligible.[1]

Does it matter what round a player is drafted? According to the data, the answer is yes. 60% of all starters were drafted in the first three rounds while players drafted in rounds six or seven accounted for 9%. 71% of players who made the all-pro team were drafted in the first three rounds; the last two rounds accounted for 4.7%.[2]

From 1994 to 2016 quarterbacks drafted in the first three rounds won 49% of their games. QB’s drafted in rounds 4, 5 & 7 won 40%. What about round 6? The data for this round is skewed because of Tom Brady, a 6th round pick in the 2000 draft – #199.  Because of Mr. Brady, he and his 6th round cohorts have won 55% of their games.[3]

In 1998 Ryan Leaf was considered a can’t miss pick and was drafted second behind Eli Manning. Leaf’s size, statistics, and potential were unparalleled.  He played for four seasons and is considered by many to be the biggest draft bust in NFL history.

How can you find the next Brady while avoiding the next Leaf? It’s not easy. Despite reams of data, hours of film, and several interviews the experts, at the end of the day, are making educated guesses.

Picking individual stocks is like drafting NFL players. Investors have access to company financials, research reports, and analyst opinions to help them select the best stocks. They must pick the right stock in the right industry at the right time to make significant money.  Amazon, Apple, Berkshire Hathaway, and Intel have rewarded shareholders for decades. However, purchasing stocks like Enron, Global Crossing, or Worldcom can wipe out years of savings.

To be diversified an investor should own more than 100 stocks.[4]  During my career I’ve noticed most individual investors own between 10 and 20. Morningstar tracks over 110,000 companies in their global data base so how is it possible to consistently pick the top 10 or 20?

A better alternative for most investors is to own a diversified portfolio of low-cost mutual funds. A portfolio of seven mutual funds managed by Dimensional Fund Advisors include 16,704 securities scattered around the globe. This all-world portfolio consists of the following funds:

  • Core Equity I – DFEOX
  • Small Cap – DFSTX
  • Micro Cap – DFSCX
  • International Core – DFIEX
  • Emerging Markets Core – DFCEX
  • Real Estate – DFREX
  • Intermediate Government Fixed Income – DFIGX

An equal weighted investment into each of these funds generated returns of 10.22%, 6.84%, 8.52% and 7.48% over 1, 3, 5 and 10 years, respectively.

As an investor you can avoid single stock risk by purchasing the entire market with low-cost mutual funds. Roger Goodell, the commissioner of the NFL, benefits from every player on every team. He wins regardless of when they’re drafted, how they play, or how many years they stay in the NFL because he knows that the collective power of the league is more powerful than a single player. Be like Roger and buy the whole market so you can harness the collective power of its long-term trend.

“Set your goals high, and don’t stop till you get there.” –Bo Jackson

April 26, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  Our mission is to remove confusion, complexity, and worry from the financial planning and investment management process. For more information please visit www.parrottwealth.com.

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.  The returns don’t include taxes.

 

 

[1] http://www.ncaa.org/about/resources/research/football

[2] https://www.forbes.com/sites/prishe/2015/05/22/tracking-nfl-draft-efficiency-how-contingent-is-success-to-draft-position/#6a1b0f787495, Patrick Rishe, 5/22/2015

[3] https://www.footballoutsiders.com/stat-analysis/2017/nfl-draft-round-round-qb-study-1994-2016, by Scott Kacsmar, 3/21/2017

[4] http://www.aaii.com/journal/article/how-many-stocks-do-you-need-to-be-diversified-.touch, Daniel J. Burnside, July 2004

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