Stock Valuation comparisons to Football Player Valuations

Stock investing is seen by the people not in the finance world as some sort of wizardry act and is not accessible for the average Joe without a ‘flash’ degree in mathematical finance or investment management. However this is completely not the case!!

This post is going to compare picking a stock to picking the right football player and show the surprising comparisons between the two.
Because every average Joe with a bit of knowledge about football will have an opinion on how much a top player has been bought for.

I am going to do this comparison in regards to a striker.

Stock Analysis:

As a stock investor profits and dividends are something that is vital to look at. This can be translated easily to strikers as the dividends/profits of the player are the goals that they score for the club.

Dividends/profits or Earnings per share = Goals

Looking at this is vital to valuing a football player, the more goals they score, the more valuable they are. Of course there are other variables such as assists, successful passes but to keep things simple I am going to use goals.

As an investor you need to quantify how much these goals/profits are worth. The common way to do this in stock in investing is to look at the price to earnings ratio (PE Ratio). This is the price of the share divided by the earnings. This gives a ratio that should be uniform across all stocks, and mainly is around 15. So you pay 15 times the EPS (Annualised Earnings Per Share) for the stock.

In the footballing world this would quantify to the ratio between Price and Goals scored. Call it the PG ratio. This is vital in valuing the player.

Price(£)/EPS(Earnings Per Share) = Price(£)/GPS (Goals Per Season)

As you are reading this, you may question whether this is always true and refer back to occasions where young unproven strikers have been bought for big money. And this would be absolutely right to question.

In stock investing, investors will look at the potential growth of the company. Translating to football terms, the potential of that player to grow and score many more goals per season in the future.
In investing a business will normally have great growth potential if it is a new firms with a product or service in a fast growing industry. Their profits may not be very good, but the profitability of the business has much potential in the future. This can be seen of Facebook where it was valued on the stock market at IPO at $100bn, but its profits didn’t justify that price.

This leads to a HIGH PE ratio. Where the price is much higher than the earnings per share.

This happens in football just the same, when a young striker such as Wayne Rooney is sold for £25Million despite having an unproven goal scoring record, but he goes for a lot of money because of the great potential for goals in the future.

HIGH P/E when the firm has potential to make profit in future = HIGH P/G when player has potential to score lots of goals in the future

Potential of the firm, profitability and state of the industry aren’t always enough to invest in a stock, just as age, talent and potential aren’t always enough to invest in a football player.

Management is something any investor should look closely at, what is there long term plan and is the business run well, as this is a non-quantifiable thing to look at and something very important.

This translates well to football as some players with amazing talent and very young can go for peanuts on the transfer market such as Paul Pogba and Ravel Morrison of Manchester United. This is because of the management of the player, football teams are scared to pay big money despite their potential because of the way they manage themselves. They are sometimes uncommitted, unfit, personal life risks… all risks that could harm their potential in the future.

Firm management = Personal management and attitude of players

One last thing I am going to talk about and maybe one of the most important things for investors is good value/bargains and how to identify them. This happens just the same in the footballing world.

Most stocks performance is highly correlated with the performance of the economy as a whole and of the market as a whole. A stock can decline 50% just because of the movement of the market and the economy despite nothing happening to the actually underlying business operation. If you believe that a business is still going to be successful and still has good earnings and potential, you can pick up some amazing bargains in times like these.

This is very similar in football whereby a team can be performing poorly or have had a poor world cup, but they can still be the same talent that they have always been.

An example of this would be to look to buy a football player that is good but has had an awful world cup such as Spanish players after their terrible performance at the world cup.

Stock Bargains occur in poor economic/market conditions = Player bargains occur in poor team or world cup performance

You think this would be something many investors and football managers would be very good at doing but all too many times both sets on buyers get it wrong.

A good example of buying players on the back of a fantastic world cup but performance not living up to expectations is Ozil from Real Madrid. He had an amazing world cup, his value increased and Real Madrid over paid for him.

This happens in the investing world too, many people buy into big-unchanged companies at the top of a booming economy with very high PE ratios and see their investment decrease sharply in value when the market corrects itself.

I hope this comparison has helped many understand stock picking a bit clearer and also proven to you that stock picking is not a mystical thing for the elite in the city, but is more a game of common sense and good research.

Many of you out there without fancy degrees but are interested in stock investing are probably good at putting a price on a footballers head based on variables you didn’t even realise you were taking into account and I bet you would also make brilliant stock investors.

The myth of progressive taxation

 

Before I start, I should just clarify the definitions of progressive and regressive taxing

- Progressive: Redistributing wealth from the rich to the poor through taxation of the rich providing state services for the poor

- Regressive: Redistributing wealth from the poor through taxation of the poor to provide state services for the rich (Just like the picture above)

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There is a common myth in society that many governmental programmes are based around the idea of taking from the rich and better off in life and giving back to the poorer, less well off in life. 

Most governmental programmes are sold on this very idea, in my view, the only way they can sell an idea to the public. Who would vote for a programme that takes from the poor and gives to the rich?

Governmental programmes invariably take from the poor and very rich and give to the middle income class. 

This is based on the way that governments are formed and who they should provide for. 

There are made up of 51% vote from lower middle class to upper middle class and they provide for them.

Why not the top 51 %?   

If you are providing for the top 51% you would be including the interests of the super rich for only a few votes, therefore you would be sacrificing a large share of tax from these people in order to obtain a small number of votes. Therefore this would not be effective. 

Why not the bottom 51%?

Forming a government based on the bottom 51% would not work because the people in the bottom 51% include the people that don't require the skills needed to run a government, the skills such as being literate, having a good education etc... the lack of skills that leave them at the bottom of the economic scale (Whether it be an unfortunate start in life economically, unfortunate enough to be born with a handicap which affects productivity, poor entrepreneural capacity etc... ) 

This leaves the government being made up of the middle 51% (lower - upper middle class)

This is because these are the people that have the skills, these are the people that have gone to university and also are not cost effective in terms of sacrifising their vote (unlike the rich) 

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The best example of a tax being sold as progressive but in reality is regressive.

State subsidised higher education. (University) 

University is highly subsidised in the United Kingdom (Despite the price being hiked in recent years). 

This is sold on the fact that you tax the society (whereby the richer pay more) but you provide a subsidised service that allows anyone of any class to attend. Whether you are poor and have paid little into the system or are rich and paid lots into the system. 

However what is the reality? 

The reality is that the people that use these services are prodominantly those from the middle classed families. Whilst the poor pay a smaller amount into the system towards education they take much less from this service, also the rich pay much more for this service however their numbers of attendance does not justify the amount they pay. Therefore who wins? The middle class. The middle class that wins the vote in the UK/US. The middle class that makes up the government in the UK/US.

Here are some figures to show the participation rate in the UK.




Here you can see that the middle class makes up 75% of the University participation rate in the UK. 

Whilst the lower class makes up only 10% of university participation. 

This means that every person at the lower end of the economic scale is paying for middle class higher education to enable them to become more productive and earn a higher wage. 

Not a very progressive governmental programme if you ask me.