5 Ways Investing is Similar to Managing the NFL Salary Cap

5 Ways Investing is Similar to Managing the NFL Salary Cap

New England Heartbreak

patriots 80sI grew up about 50 miles north of Boston, in a little town called Pepperell. As a young boy I was a big football fan as I watched my beloved New England Patriots have their share of heartbreaks:

  • I watched them lose the Super Bowl in 1985 to Refrigerator Perry and the relentless Chicago Bears defense in a 46-10 old school beat down.
  • Then I suffered through a near winless season as the Patriots went 1-15 in 1990. I still can’t believe they actually won a game that year!
  • It didn’t get much better my senior year of high school as my team went 2-14 in 1992. Can it get any worse?
  • Then in my college years, I finally saw some winning years under Coach Bill Parcells: Hope was on the way!
  • The Patriots had four years in a row when the team made the playoffs. It was highlighted by a trip back to the Super Bowl in 1997. However, my hopes were dashed as they once again lost on the big stage, falling 35-21 to Brett Favre and the Packers.

Y2K Changed My Team’s Destiny

Then in 2000 something significantly changed! As Y2K became the concern of the computer world, my team changed its destiny!

It didn’t happen right away. In fact it took almost 18 months to unfold…

At first it seemed very minor. The Patriots made a head coaching change like it had many times before. This year, it went from Pete Carroll (Yes the same guy who now coaches the Seattle Seahawks) to a relatively unknown guy named Bill Belichick.

Coach Belichick had been a mostly, failed head coach for the Cleveland Browns in the early to mid 1990s, but had a great resume as a Defensive Coordinator winning Super Bowls with the New York Giants.

His first year out of the gate in New England wasn’t too impressive… The Patriots finished in last place with a 5-11 record.

However, the next season the magic began!  patriots

The Patriots won their first of four Super Bowls.

Since Coach Belichick took over as Head Coach:

  • The Patriots have finished first or second in the AFC East every year since 2001. Both second place finishes were caused by tiebreakers.
  • They have won four Super Bowls and been to 6 in the last 15 years.
  • New England has won six AFC Championship Games,
  • It has won twelve AFC East titles
  • Overall the team amassed a regular season record of 137–53.

Winning in a salary cap era is harder than it seems!

Now the National Football League (NFL) is not like many other sports where teams can go out and buy whoever they want. Every team has to play within a salary cap. Your team has a set amount of money it can spend each year and it cannot go over that limit.

Teams go out all the time and give away the moon and stars to sign one or a few big name players. These players sign monster contracts and can ruin a teams salary cap space for years or even decades.

In a day and age of the salary cap, how can the Patriots put up 15 years of such significant success?

Bill Belichick has been the king at managing the NFL’s salary cap! He has made all the difference in the world because of his incredible talent of roster management.

Recently Jason from Over the Cap, one of the best sites on the planet looking at NFL salary cap issues, answered a few questions about the salary cap. In this Q&A session, he specifically mentioned the Patriots as the top team managing the salary cap.

Here is a quote that stood out to me:

What sets New England apart isn’t so much the financial acumen (the Patriots have had more than their fair share of bad deals), but their steadfast approach to valuation of a player. They don’t waver or allow themselves to be taken advantage of. They are cold as ice when it comes to their players. It goes back years, to the team cutting Lawyer Milloy on the eve of the season. No player is bigger than the organization. Whether it was Wes Welker, Randy Moss, Richard Seymour, Logan Mankins, Mike Vrabel, Deion Branch or a number of other players, the team either turned the players into draft picks or walked away without getting stuck in a bad contract.

Just the fact that they would approach Tom Brady about accepting a contract that would pay him in the ballpark of $10 million a year is something to appreciate. The Patriots can also be very quietly generous with their players to build that trust with a player who performs.”

What does this have to do with investing?

Here are 5 ways investing is like the NFL salary cap:NFL Salary cap

  1. Don’t pay too much! In the world of investing you need to make sure you don’t pay too much for a company. As an investor, your job is to find value. Whenever a transaction takes place someone is selling and someone is buying. The person selling believes they are selling at the best possible price while the buyer believes they are buying at the best possible price. Over time only one of them will be right!  To be a succesful investor, you must become good at valuing investments.

The NFL is similar. A General Manager’s job is to understand the true value of a player. They have to evaluate talent, consider the short and long-term implications of each contract to ensure they build a roster of championship-caliber players. What if the GM overpays for one player and he gets hurt or fails to live up to expectations?   What if he pays too much for several players? If a GM makes a series of wrong moves it can sabotage the team for a long period of time. Just ask the New York Jets.

  1. You only have a limited amount of capital, make it count! Your portfolio has a limited amount of capital. Each investment you make can help or hurt your portfolio! You have a limited amount of funds. Just like an NFL team has a salary cap, your portfolio has a dollar cap. Whether it’s $1,000, $100,000, a $1 million, or more, you can only spend so much.

So you have to be wise with your investments. If you place too much into one bad company it can sink your portfolio for years to come… Yes you may be able to add to your portfolio over time, but the amount you have today needs to be managed wisely for your future.

  1. Spotting opportunities before others can prove to be extremely profitable over time. In the investment world, finding companies before others do can lead to huge wins.   When we found Tesla Motors (NASDAQ: TSLA) at $37 a share or Vipshop Holdings (NASDAQ:VIPS) at $7.20 (split adjusted) or Hanesbrands (NYSE: HBI) at $12.90 (split adjusted), it has allowed us to double, triple, and even quadruple our returns. Getting into these companies early has paid off over time. These three stocks are a big reason the Contrarian Strategies Portfolio is up nearly 160% since 2010.

Tom Brady, who was taken by the New England Patriots in the 6th round of the 2000 NFL draft, is a true example of a diamond in the rough. The Patriots found their future franchise quarterback seeing value where others missed it. By doing so, they spotted one of the best quarterbacks of all-time while other teams missed out. If you think the Patriots just “lucked out” read this article on how the Patriots drafted Brady.

brady draft

  1. Persistence and patience pay off in the long run. It often takes time to see what you really have. Many times it can take months or years for an investment idea to pay off. Very rarely does a stock just double or triple in value overnight. The event may happen regularly but finding those ideas consistently can be quite challenging. You often strike out quite a bit before hitting a home run. But if you have a solid investment game plan, your portfolio can double or triple over time and have a lot more consistency.

It is the same way with building an NFL roster. Very rarely does a trade or a signing change a team overnight. Instead it usually pays off over the course of a season or in many cases over several seasons. A player or players may need time to develop or learn the system. It may take a team a while to understand a player’s key strengths and weaknesses and how to best use that player.   Many people criticize the “Patriot way” which seems to be a cold business, but they have produced one of the most successful franchises in all of sports.

  1. Be diversified. Investors should never place too much of their portfolio into any one company no matter how good of an idea it might seem. Instead by diversifying into many companies in many sectors, you can build a winning portfolio just like a championship team!

In a league that regularly hands out $5 million, $10 million, even $20 million a year contracts, the Patriots rarely spend more than $5 million a year on any one player. Instead they build quality and depth on its 53-man roster. The last player is as important as the first. That is how they have sustained a 15-year winning run. They don’t put all their eggs in one basket.

Bottom Line: Investing is a long-term process that involves having a solid strategy for the future. It takes time and a consistent approach to be successful. Following these five key principles will make you a better investor!



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