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Personal Finance and The NFL Draft

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There are a few big events coming up soon. We've all been waiting for them for months, right? As Charles Dickens once wrote, "there's so much to write about and so little to write about." Wait, he didn't write that?

One of the top news stories is a wedding. I'm only going to be writing a paragraph about that. If I'm going to write about someone famous for being a heir and a person famous for knowing that heir, I'm going write about Paris Hilton and Kim Kardashian. They are infinitely more entertaining, right? Well at least they were for a time. Yesterday, I was watching the news and one of the top stories was Kate Middleton driving her own car. I was shocked that this qualified as news. My wife was quick to point out that they are trying to show that they are normal. I couldn't help but burst out, "They Are Normal!" If the stork delivered William to another chimney, would this wedding be a news story? Of course not.

Another one of the top news stories is the release of a white iPhone. This sounds like Crystal Pepsi to me... though at least Crystal Pepsi was a very different product. Perhaps a better analogy is Sprite with green food coloring. I have picked on fashion before, so I don't want to discount that factor. However, phones from 15 years ago had detachable nameplates and none of them made news. This reminds me of Apple making a big deal out of getting The Beatles in iTunes. They are trying to market a collosal failure of theirs as a success. Shame on all news outlets that are reporting this without calling it out.

Hmmm, maybe The Digerati Life is onto something when calls me a curmudgeon.

The big event of the day for me is the NFL Draft. I've spent more time reading about it than I like to admit. The NFL Draft combines two of my interests: football and personal finance. The football part is obvious. The personal finance aspect is not as obvious.

Four years ago, I wrote about compound interest in the NFL When you watch the draft, you'll often hear coaches describe draft picks as "currency." That's exactly what they are. They are assets that can used or traded to acquire talent. If we are to call draft picks currency, there must be a system to value them, right? It turns out that is the case. While not all teams go by this system, it is widely used. ESPN has a draft pick chart that shows the value of each pick. In theory the #1 overall pick, 3000 points is worth the 15th (1050 points), 16th (1000 points), and 17th (950 points) picks. Here's a graph of the chart of the value of a NFL draft pick:

NFL Draft Pick Value

The value of a draft pick drops off quick.

At the time of my previous article, my favorite team, the New England Patriots, traded their #28 pick to San Francisco for their first round pick in 2008 as well as the #110 in that current draft. The Patriots ended up trading that #110 pick for Randy Moss, a Hall of Famer who would go on to have his best season. The San Francisco pick in 2008 was the #7 overall in the draft, which allowed them to get Jerod Mayo, one of the best players on the team today.

How does that look in terms of value? The Patriots traded 660 points (#28) for 74 points (#110) and what turned out to be 1500 points (#7) the following year. They essentially put 586 points (660-74) in the bank and watched it grow to 1500 in a year. It's good to triple your money in a year. While the Patriots got lucky that San Francisco didn't have a good season, they set themselves up for a situation where the odds were great that they'd make out. There are only four picks worse than what they were offering.

Last year, the Patriots made a similar trade. They traded #89 for the Carolina Panther's 2nd round pick. Carolina was the worst team last year, so the Patriots got #33 in return. In this case they banked 145 points for a year for 580 points, exactly 4 times the value. The rumor is that tomorrow the Patriots will trade that #33 for a 2012 first round pick and a 2011 4th round pick. That would likely turn those 580 points into 1200. This is one of the reasons why the Patriots are so good.

Conversely, you could look at the trades from the perspective of Carolina or San Francisco. They essentially took out a loan with a 300% or 400% yearly interest rate. That's not a good thing.

This begs the question, "Why would these teams make such bad trades?" I can't say that I know the answer, but I can guess. Many teams have coaches on the hot seat. They need to bring in talent or the team owner will fire them. They also need to keep fans happy. Nothing does that like making a trade to grab a player. It shows that the team has a lot of confidence in the player.

In a word where billions of dollars are at stake, it seems odd to me that teams are pressured into making such terrible financial decisions. However, I'm happy that my favorite team is the beneficiary.

I'll be back in about an hour with analysis of what I'd do if I were the New England Patriots in this draft.

Posted on April 28, 2011.

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3 Responses to “Personal Finance and The NFL Draft”

  1. Draft picks as currency?! Geez – I should’ve short sold the entire Cleveland Browns franchise decades ago. I would’ve done as well as buying Microsoft or Apple long. Someone needs to tell these draft picks that “currency” (to a coach or team owner) is exactly what they are – and to treat the limited time horizon that they have to earn football income with respect…or they’ll go the way of a JaMarcus Russell.

  2. […] isn't the typical personal finance article… but there are parallels between Personal Finance and The NFL Draft as I wrote earlier today. So while this will mostly be about football and about my favorite team, I […]

  3. […] their draft currency to other franchises. I wrote about draft picks as currency back in 2007 and again in 2011. The Patriots traded #28 to the 49ers for their first round pick next year. The worst case scenario […]

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