I spend more time than I’d like to admit on fantasy basketball. It started with one league, then I figured I’d add another since I was already doing the work for one.
Fantasy drafts present strategy choices, including whether to pick the same players in multiple leagues. Should you maximize the benefit of your best ideas, or protect against bad picks ruining multiple teams?
This year I doubled up a few times, and as the season unfolds it seems this draft decision echoes investors wondering whether to diversify or concentrate their portfolio.
Concentration works well if your great ideas work out. Diversification protects you from mistakes and bad luck.
What’s the better pathway to wealth?
Concentration vs. Diversification
I’ve seen concentration work well, especially considering the wealth gains made through concentrated positions in private company stock. I’ve also seen it end disastrously.
Diversification technically limits your upside, but protects you. As David Booth wrote, “I think it’s safe to assume the total value of the stock market will not go to zero. But the same cannot be said about any individual stock”.
So what’s the smart capital allocator to do?
Concentrated investors argue that your money should go to your best ideas, not your weaker ones down the list.
Through a basketball lens, why would I target lesser players just to avoid doubling up on my favorites?
The Basketball Picks
Well…
I ended up with four double-ups this year: Ivica Zuba, Imaneul Quickley, Zion Williamson, and Taylor Hendricks. Zubac has worked out so far, and I’m glad I own him in both leagues. Quickley has been a disaster. He’s played three games due to injuries and isn’t coming back soon. Zion…ugh. Another hamstring injury, and I’ve already dropped him from both squads. Hendricks suffered a season-ending injury early.
If they were stocks, Zubac is the pick that worked out well, Quickley was a fine selection, and I got burned by bad luck, Zion was an awful pick (I knew better and bought into narratives that he was finally in shape), and Hendricks, I just don’t know.
But it hasn’t worked. Score one for diversification.
You diversify because the future is uncertain, and even the best analysis can be wrong. Good decisions can also be derailed by misfortune. Shareholders in First Republic Bank got wiped out last year. I still remember talking to investors who bet it all on internet stocks and got clobbered , just like folks a decade later who owned the big bank stocks.
If you’re going to forego diversification’s protection:
- Understand that you have to be right in a very challenging arena and avoid bad luck.
- Have an edge or some relevant expertise so you’re not concentrating based on amateur analysis or hunches.
- Limit the concentrated bet to what would be a survivable loss.
- Don’t invest your 401(k) in your company stock and if you receive things like RSU’s or options, exercise and sell when you can since you have ongoing exposure to the company’s performance through your job and future grants.
