I’d like to formally welcome Mike Colligan (my co-author for this article series) to DobberHockey. You can read more about Mike at the bottom of the page. For the past month we have been trading e-mails back and forth about fantasy hockey strategies for trading and player valuation, and how these strategies directly relate to many key concepts in the business world. We both possess business backgrounds from an education standpoint, and I was interested to see that Mike was using many of the same ideas and strategies from and applying them to fantasy hockey as I was. Today we will introduce the topic of value investing to you.

When we say fantasy hockey is business, we don't mean you can make a living off your championship prize money (unless you are playing in a few high-roller leagues).  What we mean is that many of the same principles that define and drive today's business world are the same principles that govern your fantasy hockey league - you just may not realize it. If you can understand where these ideas come into play and how they impact not only your team but also the competition, you'll be able to use it to your advantage for years to come (assuming your entire league isn’t reading this article).

If you're looking for some light summer reading, this probably isn't it. We'll try to define and explain the topics and theory in enough detail to not overwhelm the novice, or bore the stock market guru. Comments, feedback, and thoughts are encouraged more than ever as we all can learn from each other’s fantasy hockey experiences.

Today’s Topic: Value Investing

Wikipedia defines value investing as “the buying of securities whose shares appear underpriced by some form of fundamental analysis. In fantasy hockey terms, that sentence can be worded as “the trading for or drafting of players whose value appears undervalued by some form of fundamental analysis or research.”

Prior to a fantasy hockey draft, most of us take the time to review the players available and develop a strategy that we feel gives us the best chance to win. Are you the type that likes to draft the high-risk goalies, knowing that if you fail see immediate results you won't hesitate to hit the waiver wire for a replacement?  Or do you focus on the safe, veteran players like Detroit’s Brian Rafalski, who is a pretty safe bet to put up 10 goals and 40 assists each year?

Different investors often approach the stock market in the same way. There are a number of strategies that can influence which companies you buy stock in and when you buy it. Some day-traders are extremely active, always looking for the 'stock du jour'. In fantasy hockey, these are the poolies who overpay for the quick starters, like Filip Kuba and Matt Carle.

Value investing is a more patient and calculated approach. Poolies who can't keep their emotions in check may have trouble applying the theory. The Fathers of Value Investing are Benjamin Graham and David Dodd, former Columbia Business School Professors. The two most famous books on the subject are Security Analysis and The Intelligent Investor if you decide to read more into the subject.

To further the earlier definition of the term, Investopedia defines value investing as “the strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

To continue with the definitions, intrinsic value is defined as “the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.”

There's a lot packed into those few lines, but here are a couple important takeaways which we'll start to look at in the sense of fantasy hockey.

1. Since most poolies are searching for players trading for less than their intrinsic values, it becomes very important that they are valuing players correctly in the first place.  If we begin to overvalue a hometown player or a personal favorite, we often get tricked into thinking we’re acquiring him at a discount when we may really be paying fair price or overpaying.

One example is Kris Versteeg. Pretend you live in Chicago or are a huge fan of the Blackhawks, and assume that after recording 53 points in 2008-09, Versteeg is easily a 65 point player in 2009-10. You get the chance to acquire him at the price of a 50 point player and feel you are 'selecting a player that's trading for less than his intrinsic value', just as the definition instructs you to do.  Unfortunately, your valuation is flawed and you failed to take into account the arrival of Marian Hossa and the impact it would have on Versteeg's playing time, linemates, and opportunity.  Instead of underpaying for Versteeg, you're actually overpaying. Versteeg ended up regressing to 44 points in 2009-10.

(In Part II of our 'Business of Fantasy Hockey' series (coming next week), we'll look at how to correctly determine a player's true intrinsic value.)

2. You manage and operate your team under the belief that the market (other owners) overreact to good and bad news, resulting in value movements that do not correspond to how the player will perform in the long run.  This is the classic idea of 'buy-low' or 'sell-high' that you hear tossed around a lot in fantasy hockey circles. I have used my World Junior Championship inflation scheme in the past many times, and I know others have had successes with it as well. Prospects that perform well over the course of the two-week tournament often experience an artificial value inflation that does not directly reflect their upside or abilities over the course of a season or career.

With regards to buying low, the assumption is that at some point (later that season or in future seasons depending on your time horizon), a player will eventually snap out of his funk and return to his proper level of production. You should constantly be doing an inventory of players on other teams searching for ones that aren't living up to their intrinsic value, as well as players on your own team who are exceeding their values and may be good sell-high candidates.

After piling up 10 wins in October, Craig Anderson was being pegged as a lock for the Vezina. If you had tried to trade for him at this point, the asking price was likely through the roof, if he was even available at all. But if you had stuck to your valuation and analysis of long-term fundamentals, you'd remember that Anderson's most active season only featured 27 starts.  Despite his superhuman efforts, he wasn't going to be able to handle the rigors of a full-time starting job and continue his incredible level of play past the first few weeks of the season. He finished the season as one of the better fantasy goalies in the league, but his level of play dropped a bit as the season progressed (Anderson won only 12 games combined in the final four months of the season).

(In Part III of our series, we'll dive into the psychology of crowds (the majority) and how to not only separate your team from the 'madness of the markets', but also take advantage of the opportunities it creates.)

Mike Colligan is an NHL analyst, as well as the Pittsburgh Penguins correspondent at The Hockey Writers.  He graduated with a degree in Business Administration and in his free time pursues interests in stocks, investing, hockey, and now the intersection of all three.  You can check out more of his work at here or follow him on Twitter.

Comments (8)

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Dave said:

holy awesome How much do I love the concept behind this series? I learned my lesson picking individual stocks a while ago, and now strictly index my RRSP portfolio. So how do I get my "buy low, sell high" kicks without bankrupting myself? Enter pooling. Absolutely brilliant read, the kind of thing you'll only find on Dobberhockey and what makes it stand head & shoulders above the rest. I would love to see this become a regular feature with "value" and "momentum" candidates suggested for consideration. Cheers, Dave.

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July 25, 2010
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krisco said:

	... you think you could apply this to band-aid boys though, i dont see why not, but, There's only so much a Gonchar or Gaborik owner can take... Good read though.
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July 22, 2010
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Mike Colligan said:

Easier said than done PJ, you're exactly right. The common saying about value investing is it's easy to understand in principle, but difficult to implement in practice. What we're going to do is explain the principles. If it were easy to implement, everyone would already be doing it in your league. This is why we figured now is a good time to think about this stuff, when you've had a chance to step away from the NHL for a few months. From your comment, you may be really interested in Part III which will focus on controlling your emotions. If you read the value investing definition again, you'll realize that you're looking to buy or sell when the market (other owners) overreacts. More often than not, you're going to be acting against the feelings and emotions of the majority of poolies in your league. This definitely isn't easy to do. One of the richest men in the world, Warren Buffett, made his billions from value investing. His quote that I always try to remember is "be greedy when others are fearful, and fearful when others are greedy." When everyone is down on a player, it's time to be greedy and think about buying him on the cheap. When everyone gets overexcited about a player, it's time to be fearful and think about selling. Hope that makes sense.

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July 21, 2010 | url
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PJ said:

	Sell high, sure... I love the analogy, have bought into it for a while, and am greatly looking forward to the next installments. Easier said than done though, like with stocks its the sell event that's the hardest. I STILL cringe when I recall deciding not to move Voros on NYR early in 2008 when he went gang-busters with Dubinsky for about 8 games and then disappeared. Couldn't do it...
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July 21, 2010
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UKflames said:

	Nice article Great read and left me wanting more, really looking forward to the next 2 sections. Keep up the good work.
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July 21, 2010
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angus said:

... This is Part I. A bit of an intro to the series as well as covering the first topic. Part II out next week. Part III out in two weeks. May be more. Thanks! I figured this was a great time (not much going on) to discuss some interesting stuff. Not aiming to teach, just to provide structure/understanding for thought processes and decision-making processes that they may or may not already be using.

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July 20, 2010
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Jason said:

	Part 1 and Part 2 Were those 'teasers'? Will there be more substance added to Part I & II or is that it? Are you aiming to teach fantasy hockey fans about business by using hockey in your examples? Like to see where this is going.
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July 20, 2010
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cc said:

	... Interesting and accurate start, Angus & Mike, curious to see where you take it. Thanks!
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July 20, 2010
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