The NFL Draft was last weekend. We now have the absurd post-draft grades,
where despite these players never having played a down, teams are given an
evaluation based on perceived value of the picks.
While not as absurd, I do find it silly that NFL GMs are
considered great or horrible based on a handful of picks. Think about it, if roughly 60% of picks pan
out a GM is considered “good”. That’s a
bit better than a coin flip.
For simplicity, let’s assume the first two rounds present
the only chance of producing legit starters, and assume a GM has about three
years to show results. Thus, in three
years a GM must count on roughly 3.6 picks in the first two rounds to become
good, if not great, starters. If only
two succeed he is a total failure, three he’s average, and four plus he is
probably a success/genius.
The sample size is extraordinary small, the success or
failure probability is essentially even, and the margin of error is narrow; so the
results of the pick are not a good indication of a GM’s skill or luck, at least
over the course of a few years. Thus, it’s
the process that matters – how do GMs evaluate players? The success of a player is probabilistic and therefore
there is always a chance of failure. A
GM can do everything right in terms of his process, yet ultimately have a poor
result.
No, I haven’t started a sports blog, but I do see many
parallels between a portfolio manager (PM) and a GM. A PM can have years of underperformance, but
have a strong process and will ultimately show skill and subsequent outperformance
over the long-term (i.e. the skill of coming to solid probabilistic conclusion
is born over a large sample size).
Therefore, it is how they invest, not the short-term returns, which are
of concern to me. Investors typically
make the mistake of selling a manager early or passing on one altogether
because of terrible one or three year returns, when qualitatively the same
process is in place the has led to exceptional long-run performance.
For NFL GMs, unfortunately they aren’t graded on the same
curve as I grade PMs.
