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.