Football and Fund Investing

With the pro football season kicking off tonight, it's time again for one of my superfluous digressions into the corollaries between investing and sports. I can already hear some of you groaning, but it has been approximately five months since I wrote about the NCAA basketball tournament, so cut me some slack. Next week, I'll get back to writing about something I actually know about.

As I was musing about the upcoming football season, I thought of several strong connections between the NFL and fund investing. These connections can provide investors with some lessons about team-building and other insights into human behavior. For example, consider  Fidelity Low-Priced Stock (FLPSX) or  Legg Mason Value (LMVTX). Both are solid investments, in large part due to their talented managers. If Joel Tillinghast or Bill Miller departed or retired, investors would likely cool on these funds. Similarly, would anyone be picking the Indianapolis Colts to have a good year if it weren't for the presence of star quarterback Peyton Manning? Not likely. In investing as in sports, it's plausible to hitch your wagon to one person, but you should be ready to reconsider your investment if that person departs.

Some funds, such as  Vanguard Wellington (VWELX), take the opposite approach. Their strategies aren't sexy or dependent on one star person. Instead, they employ a low-cost, diversified approach that relies on a set of factors working together in harmony. This is much like the approach of the New England Patriots, who have been strong and remarkably consistent performers. The Patriots rarely have many big names on the roster, instead spreading dollars among a mix of mostly overlooked players. It's a classic "buy low, sell high" strategy. By not depending on one player, it diversifies away some of the risks associated with a long season, such as injuries to a key player.

Of course, other teams (the Washington Redskins come to mind), are happy to pay for pricey personnel, just like momentum funds are willing to buy overpriced stocks. The risk, of course, is that when a momentum fund fails, it does so spectacularly. In much the same way, the Redskins have been spectacularly bad in the past few years despite a lineup of stars. But momentum funds invariably get it together for the occasional successful run, and I'm guessing that the Redskins will do that sooner or later, too. That doesn't mean that I think the team is going to put together a multiyear run or that I'd risk much money on its chances. Just the opposite: There is a salary cap in football, and the team is going to hurt in the long run because it's been focused on delivering in the short run. Similarly, if you invest with an eye to the short term, you're likely to score big from time to time, but don't expect to parlay that into a successful long-term strategy.

On the other hand, there are funds with long-serving portfolio managers who have hit the proverbial rough patch. A fund such as  Weitz Partners Value (WPVLX) fits the bill. Manager Wally Weitz hasn't altered his fundamental approach, but the sectors he favors have largely been out of favor. He's also made a few notably poor picks, but that's par for the course. The temptation is often to give up on a fund like this when it is at a low point, but it may surprise on the upside. That's the way I feel about the Pittsburgh Steelers, the team with the longest-serving head coach in the NFL. He's had a rough run lately, partly due to some lousy personnel decisions, but my guess is that the Steelers will do better than most expect this year. Don't underestimate the value of consistency, even if it tests your patience.

We can also make the mistake of underestimating an investment that has been entirely retooled. Several AXP funds, for instance, have substantially improved themselves with new investment personnel. Further, a new chief investment officer has brought more cohesiveness to the whole firm, which had been struggling. Still, investors haven't bitten yet. Sure, many have a lousy legacy, but if a fund has undergone real transformation, it's important to set that aside when considering the future. After all, even the perennially awful Cincinnati Bengals may be on the upswing after the arrival of a new coach and a highly touted quarterback.

That doesn't mean you shouldn't get rid of lousy investments, especially the funds you've been holding onto in the hope you'll someday recoup your initial investment. Often, an investor won't sell such a fund even though he or she understands that there was something fundamentally wrong in the initial analysis. It's a poor decision, but as behavioral theorists point out, it's one we make all too often when our emotions are involved. What else would explain my continued support of the Chicago Bears?