Sportfolio Management: Playing with Currency

Tom Szczerbowski - Getty Images

Is it too early to start talking about the draft and building teams? Richard Hill believes that topic is for year-round discussion. Let's lay down the basics for Football Financial Analysis by defining the currency upon which the NFL's internal economy is run.

There's value everywhere. Deion Branch was worth a 4th round pick. Richard Seymour was worth a future first round pick. Players are worth players, picks are worth picks, and teams assign their own individual values for each piece of the puzzle.

Draft value charts have been developed (I like my 100 point scale chart the best, if I say so myself) in order to try and put a relative value on each draft pick; the earlier the pick, the more valuable the position due to the talent of players. That makes sense.

Based upon the draft chart, teams can swap picks in sort of like an open market trading and bartering system. A first round pick might be worth a pair of second rounders. A fourth rounder might go for a future third. Value for value. This is pretty simple and can be compared to currency- each point on the value chart is worth 1 dollar so the first overall pick with worth $100, while the last few picks are worth pennies.

Let's move that to the open market- teams are willing to trade during the draft as one party might want twenty dollars now, in exchange for a couple ten dollar bills and a transaction fee. Think of the first round as a big bill that you want to break. You're at a pizza joint and you have a $50 bill, yet the pizza you want is only worth $8.50. In essence, teams can get their pizza and have change left over- and that's what the Patriots do when they trade down.

In 2010, they were holding some cash in the first round when Devin McCourty was on the table. Instead of spending all of their money at once to get McCourty, they decided to trade down and pick up a few dollars to spend later. Of course they risked someone else taking McCourty, but that was a calculated risk they were willing to take. In my opinion, the value they gained from traded down was worth the marginal difference in expected performance by the next guy on their board.

Other teams don't follow this method and, like the Steelers or the Giants, prefer to spend the money that's given to them. They might end up overpaying for a player, but they do so in order to get the player that they want. No risk- just getting "their guy."

Because teams have different models of drafting, each team has their own different concept of the value of a draft pick. The value chart does its best to find the market average for picks, but it's just that- an average. Some teams put a premium on draft picks (Patriots), while others are willing to package all of them together because they believe the players are greater than the picks (Jets). Both methods have their ups and downs, and the result is that each team in the league has their own unique opinion and value for every pick.

Consider that akin to foreign currency. Different places have different currencies, although they're all used for the same general purpose- a vehicle for value. However, currency from one country doesn't necessarily match the value of currency from another. In a similar way, the 100th overall pick to the Patriots might mean something entirely different to the Patriots and to the Steelers. The Patriots might be willing to sell the position for less in order to obtain a future 3rd round pick, while the Steelers might place a premium on the slot because they have their eyes on another wide receiver. Both teams see value at the 100th spot, but that value differs for each team.

The fun doesn't stop with the draft, though. If currency is related to draft picks, the players are absolutely the products- and when the Redskins paid to grab Robert Griffin III, they spent enough for a Porsche (or a lot of Porsches, technically).

And just as the hometown Germans perceive the value and prestige of a BMW to be different than Americans do, some teams value their products differently as well. Would any team in playoff contention offer as much of a premium for RGIII as the Redskins did? Very doubtful, in my opinion. For the Redskins, though, he means an answer to their quarterbacking woes. As such, they were willing to pay a premium over the Cleveland Browns offer (eh, sort of. Some politics involved with the Rams) in order to get their player.

And that's how the foundations of Football economics are laid down. Draft picks are currency and players are product. Since there is a cap on real money that can be spent, teams must maximize the return on their currency to put the best product on the field.

Over the past few years, we could see how the Patriots maximized the value of their draft picks, treating their first round pick acquired from trading Richard Seymour as an annuity, with a second round pick coupon. They finally decided to cash in this year to grab Chandler Jones and Dont'a Hightower. That's an example of the Patriots actively attempting to move and invest their currency in order to obtain the highest quality products.

There are many other ways to build a team and to approach valuations- in my view, the Patriots approach is a winning one.

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(Note: This is kind of a fluff piece to establish the football definition for currency. More in-depth and impactful topics will be covered later)

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