2011 Portfolio

It’s time to identify those teams that are going to produce returns this year.  I don’t have a lot of rules to go by in picking teams for my portfolio but there are two that I’ve identified:

1. Pick teams that Vegas is predicting to win 10 games.  As we’ve talked about in the last couple of posts, teams that win 10 games have a 77% chance of returning money. Also if we look at the top 10 teams, based on returns, over the last 10 years: 74% of them won at least 10 games.  So 10 game winners produce higher returns as well as being less likely to produce negative returns
2. Pick teams that did not finish in the top 10 in returns from the previous year.  The top 10 teams, on average, finish with fewer wins the following year.  And rarely repeat in the top 10 in the following year.

At the end of this column I’ve posted the returns from last year. It isn’t suprising that the Buccaneers and the Bears were the top two in returns. Both teams outperformed expectations last year, as a result they were able to win games as underdogs and produce multiplied returns. Two suprises though were that the Packers and the Colts both produced negative returns.  This is because they were both expected to be very good last year.  As a result both teams were heavy favorites in many of their games. Remember that when a team is a 7 point favorite (-7) they will only return 31% of the wager.  So winning when you are heavily favored only return 0.3 whereas losing returns -1.00.

Now on to picking the portfolio.  I am going to follow Warren Buffet’s right hand man, Charlie Munger’s advice on diversification: don’t do it. There are, on average, ten 10 win teams every year. I’m not trying to prove anything as a fortune-teller, I’m simply looking for value, so I’m not trying to pick them all. This year, my rules dictate that I select a portfolio of 3 teams.  I would love to find more teams for the portfolio but no other teams match my selection criteria.

As you’ll see from the 2010 top 10: perennial favorites as the Steelers, Patriots, and Ravens won’t be in the portfolio. The Jets and Falcons will not be selected either. Only three teams match my criteria, therefore the portfolio will consist of the following teams:

1. San Diego Chargers
2. New Orleans Saints
3. Green Bay Packers

These three teams were selected for the following reasons:

1. They finished outside the top 10 last year in returns
2. They are predicted to win 10 or more games this year
3. San Diego and New Orleans are flying under the radar this year due to last year.  San Diego missed the playoffs entirely due to horrendous special teams and the Saints got beat in the first round of the playoffs by the Seahawks, which were a 10 point underdog.
4. They have fantastic QBs.  Although not a predictor of financial success, a good QB is a critical component to on-the-field success and therefore necessary to get to 10 wins

To be honest the Packers scare me and I wasn’t going to select them even though the match my criteria. I’m concerned that they are going to get unfavorable spreads this year because they are a public team and they won the Super Bowl last year which gives them even more favorable buzz.  Good buzz means bad spreads and bad returns. Their phenomenal playoff run made everybody forget that they were lucky to make the playoffs last year.  They would have fit perfectly with the Chargers and Saints had they not gotten hot at playoff time (or as Packer fans like to say: Played up to their potential). At least the Eagles went crazy in free agency and took some of the NFC attention away from the Packers.  So I can hope for decent spreads at the beginning of the year.

There are two more items to consider:

1. Investing goals: When you buy a stock you will likely not hold it forever.  There is a price target that will produce a desired return.  At that point you sell the stock.  The same thing goes here.  The average return for 10 win teams was 2.0 (12.5% return).  I know there is some sort of financial calculation, based on the risk of the investment, for how much return I should require.  If I find my financial accounting text book, I’ll look that up and calculate it.  For now I’m going with 2 times the average, or a return of 4.  If any team in my portfolio reaches a return of 4 throughout the season, I’m “selling” that team.
2. Head to head match-ups:  This sounds kind of stupid, but I’m going to play it both ways. The entire point of this exercise is to try and remove human judgement from the process as much as possible. Therefore, for this week’s game between the Packers and the Saints, I’ll be selecting both teams. Which basically reflects my opinion anyway.  I have no idea who is going to win.

I’ll be tracking my portfolio in this blog.  If I get ambitious I’ll create a website that will track the returns of every team in the NFL.  Thanks for reading

	Team	Wins	Return
1	Tampa Bay Buccaneers	10	6.29
2	Chicago Bears	11	6.15
3	New England Patriots	14	6.15
4	Atlanta Falcons	13	3.95
5	Pittsburgh Steelers	12	3.36
6	New York Jets	11	2.75
7	Jacksonville Jaguars	8	2.09
8	Kansas City Chiefs	10	2.06
9	Oakland Raiders	8	1.44
10	Baltimore Ravens	12	1.36
11	Philadelphia Eagles	10	1.28
12	Washington Redskins	6	1.00
13	St. Louis Rams	7	0.28
14	Miami Dolphins	7	-0.04
15	New York Giants	10	-0.10
16	New Orleans Saints	11	-0.29
17	Seattle Seahawks	7	-0.31
18	Green Bay Packers	10	-0.60
19	Indianapolis Colts	10	-1.11
20	Detroit Lions	6	-2.47
21	San Diego Chargers	9	-3.25
22	Arizona Cardinals	5	-3.54
23	Tennessee Titans	6	-4.06
24	Dallas Cowboys	6	-5.08
25	Cleveland Browns	5	-6.15
26	Cincinnati Bengals	4	-6.25
27	Houston Texans	6	-6.48
28	Buffalo Bills	4	-6.66
29	San Francisco 49ers	6	-6.79
30	Denver Broncos	4	-7.32
31	Minnesota Vikings	6	-7.46
32	Carolina Panthers	2	-12.38

To calculate dollars, multiply return by single game wager for total season dollar return

More excellent Charlie Munger Quotes: http://www.gurufocus.com/news/119820/30-of-charlie-mungers-best-quotes

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