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NFL Draft

by | Jul 24, 2024 | Uncategorized

NFL Draft

We must admit a guilty pleasure to you: We follow the NFL draft, when NFL football teams poke, prod, test, and time former college football players who seek to play in the league and earn the millions of dollars a year professional players are often paid.

It is a hopeful time for fans who wonder if a particular quarterback or wide receiver is who their team needs to win the Super Bowl (or, in my Jacksonville Jaguars case, get to .500!). But our interest goes beyond the impact the players might have on the field. The draft also has interesting lessons for investors.

The NFL strives through its rules and policies to make every game close and interesting. This, in part, has created passionate and vocal fans. This passion leads to billions of dollars in revenue for the league. Success on the field increases the teams’ revenues and profits. NFL franchises sell for hundreds of millions of dollars, so they are generally owned by successful businesspeople. The scouts are professionals who are dedicated to the assessment of football players. Since the first NFL draft was held in 1936, thousands of players have been drafted and played, the media and fans have scrutinized every pick, and, thus there is a large data set.

So drafting is very public, costly in terms of salaries paid to the drafted players, and influential to the value of the franchises. The drafters have expertise, lots of data, and a singular motivation – to win. And yet the most common metric discussed prior to the draft is the 40-yard dash time. A player’s performance in the 40-yard dash greatly impacts how highly he is drafted and, therefore, his pay. Unfortunately, there is no correlation between a player’s 40-yard dash time and his success on the field other than at the running back position. One must wonder: if highly knowledgeable and singularly motivated experts with lots of data can persist on valuing a meaningless metric, then what opportunities exist in the stock market where there are divergent motivations, imperfect data, and unexamined candidates?

Divergent motivations among market participants can be seen in spinoffs, bankruptcies, and businesses whose stock has performed poorly. Some investors simply sell spinoffs without regard to the valuation because they are not interested in the business, the market capitalization is below the minimum of their investment mandate, or the resulting position is not worth their time. To avoid taint and discomfort, some investors sell their losers or will not purchase the securities of businesses in or near bankruptcy.

The unexamined include small market capitalization businesses, newly public companies for which is there is not a readily available comparison, businesses that fall in the no man’s land between Growth and Value investors, conglomerates, and complex situations. Determining the intrinsic value of these – even finding them – requires a lot of hard work that many are not willing to undertake. The process is fun for us, not work.

Finally, we capitalize on situations where other investors overemphasize metrics or characteristics relative to the impact on intrinsic value. Some metrics/characteristics that are overvalued include trading liquidity of the security, high current growth (often without consideration of the durability of that growth), the glamour of the company and/or industry in which is competes, EBITDA, and simplicity. We happily (and profitably!) supply their qualities to the market by buying when these attributes are receding and selling when they are increasing.

Am I eligible to Convert my Traditional IRA to a Roth IRA?

Converting your Traditional IRA to a Roth IRA can be one of the best financial decisions made when saving for retirement if done correctly. Prior to 2010 there was an income limit that restricted the conversion to a Roth IRA if your (AGI) was over $100,000. As of 2013, the income limitation does not exist for a conversion, but it still exists for contributions. This does not mean it will not come back in the future, but for 2013 and beyond anyone can convert an existing Traditional IRA to a Roth IRA regardless of income.

For example, someone has a Traditional IRA with $350,000 invested, that IRA can be converted to a Roth and all the taxes need to be paid for the tax year the conversion was completed. After converting to a Roth, the money grows tax-free. Paying the taxes on this money now might sound like a tough pill to swallow, but the potential tax savings down the road can be significant. Wouldn’t you rather pay taxes on $350,000 now than pay taxes on $1,000,000 in the future? One of the keys to doing this correctly is paying the taxes with funds outside of a qualified plan. Paying the taxes with money from the IRA defeats the purpose and will negate the full tax saving potential.

This is just one example of completing a Roth conversion. You can do partial conversions as well. This means you do not have to convert the entire account. You could develop a strategy of doing partial Roth conversions over multiple years. The key is to consult with your tax advisor or accountant to make sure the conversion will not put you into another tax bracket. Every dollar you convert is taxed at your ordinary income tax rate. This strategy works best for younger investors who have longer to allow the money to grow and compound. It can also work well for an older investor who is in a low tax bracket. Another reason to convert to a Roth is that Roth IRAs are not subject to the Required Minimum Distribution after you reach age 73. For those of you out there that do not plan to use your IRA money to live this can be a huge advantage when it comes to passing along your IRA to your beneficiaries. Roth IRAs continue to grow tax-free after the conversion and after you die. There are distribution requirements for the beneficiaries, but the distributions are tax-free as well.
This strategy might not be right for everyone. I would advise you to consult with a Certified Financial Planner™ or your tax advisor prior to taking advantage of this potentially large tax savings. One of the best times to complete a Roth conversion is when the value of your Traditional IRA has fallen due to a market correction like we experienced in 2022. If you have questions on this article or would like to schedule a free financial review. Please contact Jay Chapman at 772-320-9658 or email [email protected].

Jay Chapman| CFP®

Jay Chapman| CFP®

Founder

Jay Chapman, CFP®, is founder of Chapman Capital Advisors, as a member of the advisory team. He has over 20 years of experience in the Financial Services industry.

Will Thompson | CFA®, CFP®, AIF®

Will Thompson | CFA®, CFP®, AIF®

Advisor

Will provides the in-house expertise of CFP®, CFA®, and AIF® that is uncommon for boutique firms.


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