What Fantasy Sports Can Teach You About Investing | Erik Averill, Brandon Averill, Justin Dyer | AWM Insights #49
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Episode Summary
While every front office executive surely doesn’t look like Brad Pitt in Moneyball, sports are now driven by analytics.
Why?
Teams are trying to figure out a way to predict who is going to be successful inside the structure of the given game. How to construct a portfolio, i.e. a team of players that's going to produce wins that results in profits for the company (team).
Teams are investing millions of dollars into players for a desired return. Analytics removes the guesswork. Players are chosen based on data not emotion. The data explains what “drives return.”
Juxtapose that with fantasy sports. Fans fill their fantasy teams based on familiarity, gut feel and likability. There's a big difference between you running your fantasy team and the front office of the Seahawks. It’s amateur versus professional.
The professional relies on the analytics, the evidence, the drivers of return.
Sound familiar?
Listen in as we breakdown the pro moves surrounding Bitcoin, day trading and the markets.
Episode Highlights
(2:14): How Many Traders Make Money?
(5:02): Where do returns really come from?
(7:05): Fantasy Sports & Investing
(10:23): Why we invest.
(14:11): Keys to being a successful investor
Episode Resources
A study of Brazilian futures traders found 97% of individuals who traded in the market for more than 300 days lost money on their trades.
The SEC studied the habits of retail FX traders and discovered, “approximately 70% of customers lose money every quarter and on average 100% of a retail customer’s investment is lost in less than 12 months.”
“If you want to be a successful long-term investor, you have to ask "are the odds in my favor?" and the answer quite simply is absolutely not.” – Brandon Averill
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Erik Averill: LinkedIn
Brandon Averill: LinkedIn
Justin Dyer: LinkedIn
+ Read the Transcript
Erik Averill (17:06): Hey, everyone. Welcome back to another episode of AWM insights. It's your power three to 2 CPWAs in a CFA. We are Eric, Brandon and Justin, and each week we cover what you need to know to capture the returns you deserve and invest like a pro. And once again, we continue to see the public stock market growing higher, more things in the news around Bitcoin. Elon Musk shocks the world, says Tesla buys $1.5 billion worth of Bitcoin with mixed results of seeing a Bitcoin soaring towards 50,000 yet Tesla's stock dropping. We'll get into that.
Erik Averill (17:51): We also saw Bumble file for their IPO this week, jumping over 60% right off the initial public offering. So we'll talk a little bit about that, but really so many of our conversations in the last few weeks around Bitcoin around GameStop, which is down 90% now, is really where are returns coming from. And so we're going to talk the majority of the show, ... really what the whole show is about is how do we make sure that you are capturing these returns, but doing it with the best evidence possible. But before we get into that, really, what we want to break down is around this GameStop mania is what does it mean to actually be a trader.
Brandon Averill (18:37): Yeah, Erik. I mean, I thought it was pretty fascinating. We've certainly not seen a shortage of questions. Hey, my buddy he bought GameStop. He rode it all the way up. This is amazing. And he made some money. I think we always go back to the questions, right. We're, "Did he sell and take chips off the table" and in some cases the answer has been yes, and it's been pretty phenomenal. I mean, good for these people that have been able to take advantage of it.
Brandon Averill (19:04): Unfortunately, there's equally ... there's always a buyer and seller, right? So there have been some people, unfortunately, that I've lost in this situation. I thought that was kind of the fascinating thing. I'm not going to get distracted here, but I am going to pull up the exact studies because I thought it was great to hit on these.
Brandon Averill (19:21): But at the end of the day, what we know is that day trading is hard. It's really hard. And it seems really easy right now. And this is what we continue to try to bring across our clients is, "Hey, it seems easy to jump on the GameStop train. It seems easy to jump on this Bitcoin train. Everybody around me is making money." But when we start to look back, right ... and this is just a moment in time, but we look back at some of these studies. There was a study of Brazilian futures traders, and they found that 97% of individuals who traded in the market for more than 300 days lost money on their trades. I mean, that's incredible, right? So yes, you can get lucky. Yes, you can make a lot of money if you happen to get the right trade, but can it be persistent?
Brandon Averill (20:11): Can it be pervasive? And there's so many more. I mean the SEC studied the habits of retail FX traders. So FX, foreign exchange, this is your Bitcoin people, discovered that approximately 70% of customers lose money every quarter. And on average 100% of a retail customer's investment is lost in less than 12 months. I mean, when you start to look at this, right, and if you want to be a successful long-term investor, you have to look at these things and go "Are the odds in my favor" and the answer quite simply as absolutely not.
Brandon Averill (20:45): You know, the one thing that I think we can take away from day trading, the one guarantee that you can have and guarantees a bad word in our world, but we can guarantee it is taxes. There was a story of a gentleman that he hit the GameStop stuff right. He made eight grand trading and all this kind of stuff, and then he got his 1099 from the brokerage and it was 34 pages long. So I think he just ... this is something we're also seeing this being forgotten about.
Justin Dyer (21:14): Yeah, and you have to separate ... kind of everything you're saying, Brandon, I would categorize as speculation, right? It's not really true investing. Some people are doing it, right. They're investing their time, their energy, their human capital, which we appreciate, I guess, to an extent. In day trading it's an incredibly difficult thing to actually realize value from ... to everything you just highlighted. But when we think about long-term investing it's not speculation. We're not trying to chase the next fad, figure out what the next GameStop is.
Justin Dyer (21:50): There was something on Reddit actually recently where some guy asked, how do people find stocks before they explode? Legitimately asked that question, like there's some like secret sauce to it. And hey, if he figures that out, man, he's going to be a very, very wealthy individual. It's just it's all but impossible, right?
Justin Dyer (22:08): And so instead of trying to play that game, we think about things from a source of returns. Where are we compensated to take risk? Where do returns really come from? And we won't go too much into detail today, but this is kind of like a finance 101 or 201, whatever you want to call it, conversation where when you strip away the emotions, and the headlines, and the impact of social media, and the behavioral side of things you do have to get back to a formula, right?
Justin Dyer (22:41): How do you value a company? How do you make an investment? And you put some sort of input into an expected future cash flow, and then bring that back to the present and say, "Okay, here's some relative reasonable form evaluation that I'm willing to pay given that the future is unknown, right?
Justin Dyer (22:59): I mean, that's kind of what it comes down to at its very basic construct. But then beyond that you can even separate out, or break up the expected return into various components. Okay, what's inflation going to be? What's the risk-free rate of return? How much should I expect in addition to those things, because I'm holding equity and not debt? So on and so forth. So, we're going to unpack that I think in a later podcast, because it is a big, big conversation, but that's how we think about it, right? That's how true investors think about it. That's what Warren Buffet does. And even venture capitalists too, right.
Justin Dyer (23:37): They're looking at the value. They're investing into a company with some expectation about future returns. They understand that the probability of those future returns actually happening are incredibly wide. They accept 90 ... 80 to 90% of their companies going out of business. So they're requiring a higher rate of return given that loss rate. So again, everything needs to come back to some sort of fundamental definition of value at some point in time, and day trading and speculation really gets away from that.
Erik Averill (24:11): Yeah, I think a great analogy for so many of our listeners, whether you are a professional athlete or you're just a fan of sports, and we play fantasy sports, right, is we've seen the world of business just infiltrate sports in analytics, whether it's from the movie Money Ball, right, or this is just in every single sport that you see today. You'll hear them talk about the analytics. That's a fancy way of saying drivers of return. What they're doing there is going, "Is there a way to predict who is going to be successful inside the structure of this given game", right? So when you see these analytics there ultimately it's data that they're trying to predict. How do we construct a portfolio, i.e. a team of players that's going to produce as many wins that results in profits for the company, for the team. And so this is why we laugh.
Erik Averill (25:12): What usually happens is fans, right? When I fill my fantasy football team a lot of times it's names I'm familiar with, it's things that are trending, maybe on social. Sure, you have access to certain tools that you can go on and use the analytics like an amateur, but there's a big difference between you and the general manager and the front office of the Seahawks and your fantasy football team. And I think it's a great analogy because ultimately one's professional, ones amateur.
Erik Averill (25:45): One's choosing to use the analytics, the evidence, the drivers of return, and the other one's kind of more emotional. And so I just think it's a really good analogy for our listeners to think through. We're trying to be professionals and have the success over time. And we've all seen this wild stat, right, of how much of Warren Buffet's net worth has actually come after the age of 60 years old and after ... and continues to be developed. It's because he's deployed one of the greatest, most difficult things to do. Discipline, right? Staying the long course over the long-term that you will be rewarded because most people can't handle their emotions and they just have to do something, and it's so counter-culture, or counter to who we are as human beings, but just don't mess with the strategy that works, because you're just going to generate taxes, you're going to generate expenses and you're most likely going to get the timing wrong is what we know about when it comes to investing.
Justin Dyer (26:50): Yeah, I mean, it's a great analogy tying it back into the general managers behind a sports team. And I would underscore, right, they have bad games. There's nothing certain about them succeeding, right. But they're stacking the probability and the odds in their favor, and that's really what then bears fruit over the longterm, right? If you stick with something and obviously you have to revisit and reevaluate whether it makes sense in a given point in time. You can't just necessarily set it and forget it. But that burden, that hurdle, to making a change should be pretty high.
Erik Averill (27:29): And I think also, right, let's not lose sight of why we invest. We invest, right, to achieve our priorities and get the outcomes that we want. And so I think people lose context of that and it's like, "Oh. Well, I can invest in this and it's going to go to the moon". Well, do you need it to go to the moon? And what happens if it doesn't go to the moon, it goes to zero? How much does that impact your family? How much does that impact your priorities? Because I think that's a key element that people are missing right now. And if you're putting your family's financial structure at jeopardy because you're chasing something that is not probabilistically going to happen I think you need to take a step back, right, and remind yourself why we do this in the first place. We're doing it to provide for our priorities an outcomes.
Justin Dyer (28:18): Yeah, I mean, it's really sad when you hear people who bought GameStop at what ... what was the top, 400 and some odd dollars a share, right? Someone did that and it's now lost 90%. Hopefully, they did it with some advice similar to what Brandon just highlighted where their structure and the rainy day fund, their protective reserve, or essential spending is not threatened whatsoever, and they can recover, but more often than not you see and hear stories that, that's just not the case, right. They get caught up in the hype and want to put, "Hey, it's going to keep running. I'm going to put ... I'm going to double down. I'm going to put 50% of my assets in something". And it generally doesn't end well, right. It's a low probability bet.
Erik Averill (29:03): Yeah, and I think we all empathize, right? Like we all would love to get lucky and in to make a quick dollar, right. I think that, that's the allure of this that makes it hard. It's also the value of having great advisors, great certified financial planners, and chartered financial analysts, and certified private wealth advisors who are going to coach you through this, because it's not easy. The media is telling you, you are missing out. You go to the Zoom cocktail party, right. You show up in the locker room. I mean, we were at breakfast this morning, right, and somebody tells us, 'Hey, I got really lucky. Somebody told me this stock tip. I bought it at four it's at 70. We did the calculation. This guy has made $1.2 million, right. And he's sitting there going, "I kind of feel bad even telling you that", but you hear this story and you're like, "Oh, what was that stock"?
Erik Averill (29:58): You get this tension. Here we are as professionals. And I feel that right. I was on a call earlier today with another client saying, "Hey, you know what? I had Bitcoin back in 2018. It crashed. I couldn't handle it so I got out, but I have this fear of missing out, so should I buy some Bitcoin today"? I mean, here's somebody who's experienced this already, right? We have another client who shares this horrible story of what about advisor does. His parents, they have a local advisor in a specific state in the Midwest who has a discretionary account and decided to buy GameStop a week ago and literally bought it and then lost 90%. And his parents are pissed, and they should be pest.
Erik Averill (30:41): And so I think when we talk to you, as the audience, of this is, as Brandon said, you guys have worked so hard for this money that the good news, and it's what we're going to spend next week talking so much about, is saying what are the sources of returns? What are the analytics when it comes to how to make wise investment decisions so that you have a confidence in achieving their priorities that are important to you? And so we're going to spend a little bit of a nerd session next week breaking down what are the drivers of returns?
Justin Dyer (31:16): Can't wait.
Erik Averill (31:17): That means that Justin's going to lead the conversation, but in all seriousness, is I think that, that's the cool thing, is that if you can actually deploy the discipline, you can have the confidence because you have the education of what drives returns you're just going to have a better investment experience. And so make sure that you head over to awminsights.com. If you have not subscribed to the newsletter, you need to do that. Not only to make sure that you're listening to the podcast, but we're going to start to produce some of these resources that you can't get access to unless you're on the mailing list to make sure that you have the right information. And so we appreciate your guys' attention. We look forward to spending some time diving in to that with you next week. And until then stay humble, stay hungry, and always be a pro.