Value investing and the transfer market
Most clubs go for growth, but value is more fun...
This past week, this tweet got the tired, rusty gears in my dusty, cobwebbed brain to start clanking noisily:
No, this isn’t going to be a post about Mateo Kovačić, or about Chelsea, or about Spurs (Nathan’s club).
Instead, this got me thinking about an older concept in sports analytics, but one we don’t see talked about much in public for some reason: the idea of the Player Portfolio.
That is the notion that clubs might view their player roster and transfer market strategy along the lines of how an investor might amass a stock portfolio.
Yes, this idea is dehumanizing on its face, but then so is all employment really, as is the entire conventional economic system we’re stuck with that’s currently turning the surface of the earth into a giant convection oven (but that’s not for this newsletter to discuss).
Nevertheless, the Player Portfolio concept doesn’t have to be dehumanizing; in fact, it can be quite good for players in the long-term! But it depends on what your overall approach to investing is.
Perhaps the safest approach is to buy index funds, which involves buying the entire market, but this is obviously an impractical model for football (unless you like the Chelsea approach of loaning out most of your transfers until they make good).
Then there is growth investing, where you invest in a company with either a history of or potential for growth in earnings/profits, which is therefore more likely to have a higher stock price in the future.
I would argue that this is the model currently favoured by most clubs in the transfer market, and the ones that are good at it are very good indeed (see Sevilla over the past 10 years or so). You see a young player in a so-so team is putting in above-average performances or garnering a lot of attention, you do your due diligence, price them accordingly, and then buy in the hopes your team will get good performances out of them so you can transfer them at a tidy profit.
Then there is value investing. This is where you try to find stocks that you believe are priced too low against the underlying value of the company. Maybe the reason is a media-driven overreaction to a negative news story that has nothing to do with the company’s potential for growth. Maybe it’s because the company is showing far stronger fundamentals than most investors can see on the surface without reading pages and pages of company reports, Warren Buffett-style. But the idea here is that you’re banking on figuring out that a company is worth a lot more than it appears to be before the rest of the market does.
Value investing used to be the meat-and-potatoes of old school sports analytics (think Moneyball and the 2002 Oakland As), and it is an area that I’m not convinced football has properly exhausted as an avenue to properly build a competitive team on an affordable budget.
For one, value investing is not just about finding undervalued stocks (or players). It’s also about holding onto them despite short-term variability. Because value investing requires you to maintain detailed, in-depth knowledge of a company’s inner-workings and long-term prospects, you are more inclined to hold the stock despite price fluctuations—unless the company’s underlying fundamentals shift in some alarming way. So, in theory, you will actually make fewer moves in the transfer market, and the ones you do make will be far more meaningful.
This, overall, is a much better way to approach the transfer market anyway. For one, players are not stocks. If you sell a stock, it’s not going to feel anxiety about the prospect of joining some stranger’s portfolio. It’s not going to take time to generate chemistry with its fellow company holdings. It’s good to keep good players together, both psychologically and financially. Spurs offer a good (if lonely) example; the team are in a Champions League final despite securing no substantial transfers in the last two windows. It’s generally good for everyone for clubs to not panic sell when a player underperforms for a single season (and, mostly because of sunk cost fallacy, they thankfully don’t for the most part).
This approach isn’t easy, however; it requires a club to look beyond a player’s ‘counting stats’ to understand how well they’re likely to perform not just in the coming year, but over the next 3-5 seasons. Thankfully this is the very bread and butter of soccer analytics!
Or, at least, it was.
Sadly, maybe for proprietary reasons, we see less and less of this stuff in the public sphere. We know age profiles matter, we know clubs are notoriously bad at judging competitive leagues or teams (which something as basic as ELO scores can help sort out), and we know that xG and its myriad spinoff stats and models are more predictive than goals-scored and the rest. All ripe avenues to find hidden value, yes. But as a topic, I haven’t seen as much exploration lately beyond “people think X player is bad but this metric shows they’re, in fact, good,” which usually means right now, not five years from now.
And if I don’t know about this work going on, then I’m willing to bet most people working for football clubs at the moment don’t know either.
Maybe the reason is that this work doesn’t exist! It’s too difficult, too much of a science fiction to take seriously. Yet even as Nathan shows in the above tweet, even in the Sophisticated Data Savvy Premier League this work need not be particularly complex to pull off.
Maybe what matters is to simply embrace the mindset of the value investor. The margins don’t have to be huge, either. A team could look among the obviously coveted players nearing the end of their contract to find the one that is slightly undervalued compared to the rest and do everything they can do to sign them.
But as an ethos, a soup-to-nuts approach, as a capital P Process, I think there is still a lot of value left in value investing.