Johnny Manziel is a lightning rod in the world of sports.
Some people love him and some people don’t.
I love his freewheeling style as a football fan but don’t know whether to laugh or cringe when he rubs his fingers together in his “it’s all about the money” gesture.
But when the Cleveland Browns selected Manziel in the recent NFL draft, it was a shot in the arm to a franchise that has a great tradition but little recent success.
It also offers a very valuable lesson to investors.
The Browns sold 3,000 season tickets shortly after picking Johnny Football. The team had been averaging about 40 season tickets a day before the draft. Cleveland fans were reacting to new information in the marketplace and voting with their wallets.
That is a powerful demonstration of the Efficient Market Hypothesis.
The Efficient Market Hypothesis states that markets are constantly pricing in all relevant information and therefore it is hard to beat the markets thru market timing, forecasting, or picking the right stock.
One way an investor can earn a higher return is by purchasing riskier assets.
In our Manziel example, the Browns’ season ticket has become more valuable but you had no reliable way of knowing that before the draft. Case in point, if you were a Miami Heat fan, you could have gotten a better deal on a season ticket the year before Pat Riley convinced LeBron James to come to South Beach. How could you have looked into your crystal ball and known LeBron would end up in Miami? Or Peyton Manning would leave the Colts for the Broncos?
Now there is a lot of controversy around the Efficient Market Hypothesis. Critics say it doesn’t take into account behavioral issues in the marketplace or bubbles in asset prices. It is not the purpose of this article to hash out all of the academic debates other than to say that EMH says prices are fair not that prices are correct.
So what does all this mean for investors?
The good news is that you don’t have to spend a lot of time or energy trying to predict the future or the direction of a specific company. The stock market is not “I win so you lose” scenario. Participants in the stock market can benefit as companies make money and return those profits to shareholders. Of course, there is risk too as companies can go bankrupt and economies can fall into recession.
But rather than trying to outsmart all of the other market participants, investors can help capture market returns through broad-based and diverse portfolios. After all, capitalism works. Just ask Johnny Football.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
“Cleveland Browns, many others seeing benefits of Johnny Manziel mania” Crain’s Cleveland Business. May 18, 2014.