In this episode of Industry Focus: Energy, Nick Sciple chats with Motley Fool contributor Jason Hall about what they've learned about investing from college football. They enumerate the many parallels between the two, like the importance of getting talented people and strong leadership, among others. They also talk about the future of the sport, the economy in general, the risks of unpredictability and how you can safeguard yourself against them, and much more.

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This video was recorded on Aug. 6, 2020.

Nick Sciple: Welcome to Industry Focus. I am Nick Sciple. We've got a little bit of a different show planned for you today. Jason Hall and I will be talking about what we've learned about investing from college football. Jason, thanks so much for joining me on the show, as always.

Jason Hall: Really looking forward to this. And anybody that's not a sports fan, I encourage you to still listen, mainly to hear me poke fun at Nick, but also, because there are some really, really interesting parallels I think we found from our experiences with college football and investing.

Sciple: Well, I think these are both industries that are over 100 years old, both that are incredibly competitive, both that have strategies and styles that evolve over time, there's a little bit of a meta-game that goes on in both investing and college football. So, I really think that there's a lot to learn, both, in how industries progress, how people learn over time and strategies evolve, and just how to run an organization. People forget that as a football coach, you're running a team that can involve hundreds of people -- not just including your players, but your staff. So a lot of the issues that are important to leading a business organization are also paralleled in college football.

So, without further ado, let's get into some of these parallels that we see, Jason. What's your first topic about investing that college football helped you learn more about?

Hall: No. 1 without a doubt is "load up with talent." More talent means a better chance of success. I think as an organization, you want to try to hire the most talented people. If you look at college football programs, the ones that have historically been the most successful are the ones that made getting the most talented players a priority. I think as an investor, the way you carry that over is to find the best businesses, the ones that have a track record of really, really high performance, the ones that have the best margins in their industry, that have the most growth, that have a history of creating market share. There's just so many things that tie over to loading up with talent.

Sciple: Right. And recruiting is helped by having a really great brand. So, for example, I am an Alabama football fan, I went to college at Alabama, Alabama has a history as a great college football program. If you're a great high school football player, they're going to be on the shortlist of places that you want to go play football for. And I think you can look and see these examples in other areas of the world as well. I think about in tech, if I am a tech person coming out of college or a programmer or that sort of thing, one of the first companies that comes to mind for me is Apple. It's this great impressive brand I really have great positive feelings about, and that gives Apple a huge advantage in recruiting talent. And at the end of the day, people are who design these products, people are who come up with these innovations. If you can get greater access to people than your competitors, then you're in a position to succeed. And I think this ties into one of the issues that I called out, is that recruiting is really, really important. You can have someone at the head of your organization who is a legitimate genius, and I think we can see an example of that right now: Chip Kelly is at UCLA. He really revolutionized offense in college football and helped revolutionize offense in the NFL when he came to the Eagles, but he's really struggled at UCLA the past couple of years, partially because he just doesn't have the players necessary to have the success that he might have had in the past.

If you can't recruit talent in order to execute on your vision -- maybe you're someone who's very difficult to work with, who knows? -- then you won't be in a position to succeed. And so, you can never forget how important recruiting is, not just in sports, but in business as well.

Hall: Yeah, I think a parallel to that that's really close to my own heart is, you look at Georgia Bulldogs. I lived in Athens for many, many years. My wife is a UGA graduate. And when their current head coach, Kirby Smart was brought over, Kirby graduated from University of Georgia and really developed as a coach under the dreaded Nick Saban, who I have to say I have a lot of respect for. He's proven that recruiting was a key piece of the process for building the University of Georgia's football program in the four, five years since Smart has been there. And it carries over in the results, right, which ties into the next thing which for me is, "process over outcome," particularly in the short term.

It's so easy to think about buying stocks, you get so caught up in the results and what your stock does, especially in short periods of time and it can be really, really misleading, right? It can cause you to think "Maybe I have some innate gift to picking stocks." Because you buy a stock, and three months later it's gone way up, right? And that was just luck. You know, it was completely outside of anything that you necessarily controlled.

So, by developing a good process, and again, part of Georgia's process has been heavily built on recruiting the best players -- the first season Kirby Smart was there, the team went 7-6, it was massively disappointing. The roster was relatively loaded, but it was just a really, really bad season, partially because of luck -- they had a lot of injuries and a few things that happened. But now, you fast-forward over the past several years and this Georgia program has been immensely successful. I mean, it hasn't reached the highest echelon of winning a national championship, but I think by just about any other measure, it's been very, very successful because the leadership has focused on developing a process to attract great talent, to get that talent coached up, get it ready to perform. And then maximizing the performance of the product that they put on the field. And it carries over the same way in business, right?

Sciple: Yeah, I think, fundamentally the biggest thing that -- and I can skip to the biggest thing that college football taught me about investing is absolutely that, it's the process, and that's Nick Saban's trademark. That's the way he runs his organization. If you look at his very first speech when he came to the University of Alabama, I mean, gosh, you could put that type of speech in a lot of organizations and it would fit in well. And what he came out and said is, listen, we're going to achieve a lot of great things, but when you hear me talk about what we're going to do, we're not going to talk about winning national championships, we're going to talk about the things that we need to do to get there, we're going to talk about the process that we need to follow to take place. And that is each player understanding their job, their role in the organization, how they fit in, and what they need to do to be successful.

And I think that's important for lots of these organizations. So, if you come out here and say, "We're going to dominate this market," that is much less interesting to me as an investor than someone who comes out and says, "This is how we're going to do it." You can look at the example of Jeff Bezos, you can look at their very first letter from, that said, we're going to focus on long-term results over the short-term, we're going to prioritize free cash flow over accounting earnings, and this is the framework that we're going to follow to achieve these great goals of being the premier online seller in the world.

And you could have looked at that process day one and checked it against their actions and tracked the company all the way through. And I think that is why Jeff Bezos is a founder you can really get behind, because you can see what they're trying to accomplish and see the process that they're following.

Hall: Yeah. And for me, that comes to, I think the things that I've learned are probably the most important things for me as an investor, and that's the temperament and time are the great equalizers, right? If you think about the way the financial media tends to follow companies, it's this really churn-and-burn we look at every quarter, that the news cycle follows quarterly earnings, and that sort of stuff. And honestly, we learn so little about a company from one quarter to the next, it can be really, really, really challenging. So, when you think about carrying that over what I've learned from watching college football, the best coaches are kind of like Warren Buffett. They focus on long term, they have immense mental flexibility and this ability to have a process, but then acknowledge sometimes [laughs] you know, the facts have changed, sometimes you need to change that process.

I don't know, Nick, you've got an interesting story about that for college football you can share. Before you do that, I want to share my Buffett example. You know, this is somebody that's been incredibly successful for five decades. You go back 20 years ago during the dot-com run-up, and Buffett, you know, he avoided tech stocks. He said it was because he couldn't value the companies and didn't understand most of them. And the reality is, nobody could [laughs] value them back then, because they weren't earning anything. But that changed a few years ago with Apple. And Berkshire has made a massive bet on Apple, and something like half of Berkshire's capital gains in its stock portfolio are from the enormous bet the company has made on a tech stock, and that's paying off.

Sciple: Yeah, I think in sports, just like in investing, the ability to adapt over time is the key to having success over multiple decades. You look at Warren Buffett started out as a classical Ben Graham-style investor, evolved into more of someone who would buy a company and hold it for a long period of time, buy quality at a reasonable price instead of buying companies on the cheap. And that's how he's been able to have success over a long period of time. And you see the same patterns in sports among even some of the best coaches and leaders.

So, I think one great example, another Alabama football example, is the story of Bear Bryant. Everybody remembers Bear Bryant as one of the best college football coaches of all time. Well, toward the end of the 1960s, Alabama had really fallen off. In the last two years of the 1960s, I believe they had lost five games or more in both of those seasons, having been shut out for their first time in more than a decade. The team was really in a position where they thought that the best days of Alabama football were behind them. And over the summer of 1970, when Alabama was getting ready for the season, Bear Bryant one day walked into his coaches room and went up to the other coaches, drew a bunch of formations on the blackboard, and said, "Guys, listen, we have the best running back in the country in Johnny Musso, we've got a quarterback who, listen, can't throw the ball, but he can run the option. To win games this year we're going to have to run the ball to win, and the best way to run the ball and win successfully in college football today is to run the wishbone offense."

So, over the summer, Bear Bryant and Alabama secretly installed the wishbone offense. This is the time when the media was very different and you could somehow keep a secret from reporters for months and months and months and install an entire offense, and they came out in the...

Hall: I don't think Twitter existed yet.

Sciple: That's true, it's a different game. And anyway, they came out in the 1971 season, went 11-1, and almost won the National Championship. Through the course of the 1970s, won a 101, 16-1, and that's all because Bear Bryant, one of the great leaders in the history of the sport, realized that what he was doing wasn't working and adapted his strategy. And that willingness to disrupt yourself, to go away from the things that have worked for you in the past, is difficult to do, but in order to have success over many decades, is necessary.

The meta-game of investing changes over time and you need to be able to adapt, just like how the meta-game of college football evolves over time.

And Nick Saban is another example of someone who's evolved. If you look at Alabama, when he first got there in 2009, very much a running offense. And then he brought in Lane Kiffin, and now they're running the spread with two. I think you see this among all great leaders, their ability to adapt, and that's how you maintain a competitive advantage over decades versus having an innovation, sticking around until that gets competed away, and then just becoming one of the pack.

Hall: Yeah, I think we can look at two companies that kind of did things very differently, as examples of how being able to adapt and also really taking it to the next step of being a visionary can in fact impact the company. So, we think about Netflix. This is a company that essentially put Blockbuster Video out of business, that put the dominant deliverer of recorded video entertainment out of business by just doing it better and by thinking about it better. And then, kind of, at the peak of still being the dominant provider of sending out DVDs and stuff through the mail, where they really controlled this market, the company pivoted -- some would say they pivoted too quickly -- to delivering streaming content before streaming was even close to being mainstream. Of course, the stock fell sharply as a result of some of those things, but you look back at it today with hindsight and there's no doubt that Netflix CEO Reed Hastings' visionary leadership has been transformative. The stock since the Qwikster debacle, that we now look back on as like this visionary smart move to really focus on streaming, I think the stock is probably a 20-, 25-bagger since then. And that's less than a decade that this has happened.

Then on the flip side, think about a company like Microsoft, that completely failed to participate in the early phase of the mobile revolution because of concerns about cannibalizing its existing desktop business. It essentially walked away from, like, a decade of success, because it was so focused on something that they essentially had a monopoly on. And the stock went sideways for a decade as a result. It was a very challenging period for long-term investors in Microsoft. And now, obviously with Nadella, he is the new CEO, again, a visionary who's come in and said, this is where the market is going to be and this is where we need to be, with their shift into the cloud. And it's been, again, transformative for that business. So, you see clear parallels with how being willing to walk away from what's been successful in the past, because it's not necessarily what's going to be successful going forward, is so valuable.

Sciple: Yeah, I think one last point that I'll hit is, just how important leadership is. You've heard us talk about the process, you've heard us talk about recruiting and how important that is. And all that comes down to the leader at the end of the day. I think in college football you see great examples of this. You can have a great brand, but if you don't have the right coach in the job, then maybe you won't have success. A great example of that is Notre Dame, right? It's been a long period of time where Notre Dame has still been a blue blood program but has struggled to get the coaches necessary to have the success that they've had historically. And you can see that example in some businesses, when you have a CEO who has historically led the organization, brought it to the heights that it reached. When that person leaves, it can be difficult to maintain that level of success. So, ignore leadership at your peril.

Hall: Absolutely. Yeah, there's no doubt about that whatsoever.

Sciple: OK. So, moving on from the lessons we learned about investing from college football, and I think there's a lot of them. I think in any pursuit where there's lots of people all trying to compete, playing by the same rules, it's going to evolve over time, there's going to be a meta-game aspect. And the ability to adapt over time is going to determine your success or failure.

We look at college football today, we're recording this on July 17, there's a lot of question marks around what happens with the season. We've seen a number of leagues already come out and cancel their season, the Ivy League and the Patriot League most notable among those. And then we have some other conferences that have pledged to play only in-conference games, that being the Pac-12, the Big Ten, and the ACC. Jason, we're still a number of weeks away from what would be the beginning of the college football season, are you optimistic that we will end up playing by the time the beginning of September comes around?

Hall: Absolutely not. I think today, again, this is maybe several weeks prior to when you're going to be listening to this out there, folks, but today, I think there were 77,000 COVID-19 cases, the most so far in the U.S. On a worldwide basis, it was like 250,000 new cases worldwide, the most single day. Worldwide death counts are starting to go up. ICUs are filling up. I think there's real serious concern.

And maybe less so for the players, right? So, you think about it from this perspective of these student-athletes. They're young. They're healthy. You know, with the caveat that there are some that have health underlying conditions that put them at risk, I think as a general group, these are folks that in general would probably be either asymptomatic or emerge with no long-term consequences. But you think about the coaches, you think about the administrators, you think about -- the SEC is a good example of the extreme end.

Athens, Georgia. You know, [laughs] the number of people that show up in Athens every Saturday for home games more than doubles the size of the city. More people show up on game day they can actually fit in the stadium. So, you know, you're creating these very high-risk pools of people. Alcohol is involved, emotions are involved. Then, I think that one of the challenges that they have to consider, even if they're holding games, how do you keep people from just showing up in the town just to be there, because a lot of people do that with college football.

Sciple: Right. And it's worth mentioning, listeners, you're in the future, you might know stuff that we don't know yet, so this is a little bit of a pre-mortem of what might happen, so. As we look out, whether or not the season goes forward in a reduced capacity or not, we're in a situation today with some of these big leagues, like the Pac-12 and Big Ten canceling non-conference games, that there are implications for smaller programs that are already underway. So, you'll hear every year a big program like Alabama will get criticized for playing, say, a smaller school, say, like a Southern Miss., or Middle Tennessee State from a smaller conference. But I think it's important to note ... often those smaller-conference schools will get a payout in excess of $1 million to come play in that football game, which will then go to fund athletic programs, whether that's the football program at the university in question or other smaller sports. And without these games being played, this is certainly going to have some impact on the ability of smaller universities to maintain their sports program. Even today we've seen a number of schools cancel sports, whether it's track and field, swimming, that sort of thing.

Jason, what do you think, if we do see the loss of athletics programs at some of these smaller universities, what do we lose as a country?

Hall: Well, I think, something you and I have talked about a lot is that sports are part of American culture, right? I think the majority of Americans follow one sport, even just a casual level, and a plurality of Americans would call themselves sports fans, right? And it's a really important part of American culture. So, obviously, we're going to focus a little bit on the money and the finance side of it, because a lot of this is about money, but there's more to it. I think the reality is that we need, especially in a time like this, we need sports. I think sports is important, I think it gives us something to rally around, I think it gives us something to complain about, I think it gives us something to distract us. And I think those are things that are really important and healthy that can help move through this. Obviously, within balancing out the very serious threats to people's lives and long-term health. And it makes it hard to do, but I think it's just a real tough situation.

Sciple: Right. I mean, with no sports, all we got is the election to pay attention to, right? [laughs]

Hall: That's not even funny. Yeah, I'm going to cry a little bit. [laughs]

Sciple: Yeah. When we look at the financial impact, I think that's more of the focus of the show, it could be significant. So, we've seen some numbers come out from Tuscaloosa, Alabama, obviously, a very significant college football town, that the city projects that if the college football season were to be canceled, the city would lose somewhere on the order of $2 billion in revenue, is what the estimates say. And obviously, that's a massive impact for the city used to $10 billion in revenue, you're probably looking at some layoffs in the city government and that sort of thing. But it's worth noting that when you're talking about city tax revenue of $2 billion, the city is only bringing in some percentage of the total revenue being generated in the city via sales tax and that.

So, I think we can comfortably estimate that the impact on the city from a revenue point-of-view, not just the government, but the city overall, is somewhere on the order of $20 billion, right? Somewhere on the order of between $10 billion and $20 billion, depending on what the tax rate is. And so, if you extrapolate that out not just to Tuscaloosa, which is a significant college town, but Auburn, Alabama; to Athens, Georgia, like you mentioned, Jason; Columbus, Ohio; Ann Arbor, Michigan ...

Hall: Knoxville, Tennessee.

Sciple: What is the potential impact on small business here? Can we estimate that in any kind of reasonable way?

Hall: It's enormous. You know, I spent an early part of my post-college career in retail management, and the Friday after Thanksgiving is historically called Black Friday, because it's the beginning of the period when many, many consumer retail companies shift from losing money to moving into a profitable time of the year for them. So, basically, you have a month for these companies between Thanksgiving and Christmas where they make an enormous amount of their sales. And I think you carry that over to a small-town college business, a small restaurant, maybe they do a lot of catering, they have six or seven Saturdays in the fall every year that are enormously important to their ability to stay open and to make a living the rest of the year.

I think it's really hard to completely put a number to that, but I would say these are towns that they could see 15% or 20% of their restaurants that are already struggling. Let's remember too, most of these places are struggling to stay open right now as it is, just because of COVID-19. So, I think this is the kind of thing that could permanently put a large number of these businesses, thousands of them, out of business.

Sciple: Right. Significant implications, and of course, that leaves a vacuum where you would imagine some larger businesses are going to fill the gap. I am sure that changes the culture in some of these college towns.

Hall: It absolutely does. A couple of the large national restaurant associations that are already saying that a quarter of the restaurants in the country are going to close within a year, and the vast majority of those are going to be small individual or small local chains, not the big chains. So, again, it's just another case of the rich getting richer and the small business facing even a bigger hurdle to success.

Sciple: And last thing, Jason, as we look out past this individual season, what's going on with the pandemic, and look out longer term. We talked about earlier, this idea that we could lose some athletic programs permanently at some of these smaller sports track and field, etc., particularly at smaller colleges. Do you see this longer-term impacting the willingness of folks to attend college, as sports are a significant part of the college experience for some folks?

Hall: You know, I think the college experience is already facing an enormous challenge, and it's kind of ripe for disruption, because of the enormous expense that more and more people are deciding that that additional cost does not provide the potential upside in terms of higher earnings, right. So, I think there's already a lot of challenges that the entire higher education ecosystem is facing.

And I think it's worrying, because one of the healthier parts of it, in terms of financial success, is college sports. I think the average layperson doesn't really fully understand where the money comes from, how it's allocated and who pays for what. And the reality is, that you think about these coaches that make millions of dollars, that are a lot of times the most highly paid person in the state, the highest-paid state employee. Their money comes from private donors that donate large sums of money. And then there's these big sports, the TV deals that are pumping in large amounts of money -- those don't just go to pay for the football program or the basketball program that are these revenue generators, that's the money that pays for the scholarship for the golf players and the swimming and the diving programs, and a lot of these what they call non-revenue sports, that simply don't provide enough cash on their own through donations or other sources or ticket sales or that sort of thing to pay the bills.

So, the risk that this puts on -- the NCAA, they had this marketing program a number of years ago that, you know, 99% of NCAA student-athletes don't go pro, right, they go pro in something else. And so, there's an enormous amount of that cash that does flow back to educate and pay for students that end up going pro as whatever they graduated from college to do. So I think it certainly presents a risk.

But again, my thoughts are, if you fast-forward out five years, and I think we're going to get past this, I think, because it is so steeped in our culture as a society that I'm optimistic. The next year is going to be really, it's going to be tough, right, it's going to be tough and some hard decisions are going to be made, and some people are going to lose their jobs, middle-class people are going to lose their jobs simply because they work at a university that's not going to get that $1.5 million check from the University of Georgia, because they didn't have the football games that they've been planning on.

Sciple: So, I think this is another one of these things to keep in mind as we think about investing and how we can bring this around to the mindset of an investor, is how quickly things can change. I remember six months ago, if you had told me that you had an investment in a college residential real estate property, that would have been among the most safe rents on the face of the planet -- today, looking a lot more uncertain. Does this teach us any lessons about just the volatility and the unpredictability of what can happen in the market and how on your toes you need to be as an investor?

Hall: What's the saying, you know, "risk is everything that you don't know," right? I think that's what it comes back to. And I can actually give a tangible example of that college real estate thing. So, Rich Uncles is one of the crowdfunded real estate websites, and they have a REIT, real estate investment trust, that you can invest in directly through them. And if a year ago, somebody had asked me, "So I'm looking at this REIT and they own a Starbucks on a university campus, and they own a large stake in an apartment complex on a university campus, and they own a smaller stake in another apartment complex on a university campus, and also they own a Gold's Gym. And they use, like, 55% or 60% debt to assets, like that's a pretty low leverage ratio. So, what do you think, Jason, do you think that's safe?"

A year ago, I would have said, "Hell yeah, that's a great asset, it should have predictable cash flows, and it's a moderate level of leverage." And it's worth $0.32 a share today. It's been absolutely destroyed by this black swan.

And, yeah, so there's a real lesson there that even things that might look quite stable and quite low risk can still turn out to be far more risky than you expected, and that's why you have to spread your money around, so you're exposed to different risk profiles and different things that you might not expect. So, that's the takeaway for me.

Sciple: Yeah. I mean, maybe I can bring this around to one last lesson that college football can teach me about investing, and that's that sometimes weird things happen. And a perfect example is the Iron Bowl, this past year Alabama lost 48-45 in that game, lost by three points. And the difference in that game was, at the end of the first half, there was a stoppage in play...

Hall: Hey, Nick, what's the Iron Bowl?

Sciple: The Iron Bowl is the biggest rivalry in college football, Alabama versus Auburn, played every year.

Hall: Eh? College football, maybe the state of Alabama.

Sciple: So, anyway. Last year's Iron Bowl, is just one of those examples of how funny things can happen that are super unpredictable, it ended up being a three-point game, a one field goal game. And the difference in the game was that at the end of the first half there was some funkiness with the clock and the officials did a review, put one second back on the clock and Auburn was able to kick a field goal, and that was the difference in the game.

And sometimes funny things happen, it was a quirk of the rules that added one second to be put on the clock, allowed the clock to be stopped in a way that never would have happened in the normal flow of play and that ended up being the difference in the game. And I think, in a way that's similar to what happened with coronavirus. I mean, it took a lot of things to line up and go wrong for us at the exact right time in order for the set of circumstances that would allow for some of these negative adverse effects to happen, and you can't plan for these things, but sometimes they happen to you and you have to adapt with them, and, you know, roll with the punches.

Hall: My biggest takeaway is, you can't let a bad season ruin the rest of your career. And as an investor it's so easy to get caught up in, you know, like, you go back to March, late-March, the market had fallen 34% in 32 days, right, it was the fastest, hardest market crash in history. And then three months later, you know, the market has almost fully recovered from where it was at the start of the year, it's still down 8% or 9% from the peak, but you layer that over where we are now and people are looking at the other side of the coin, they're like, this is crazy, the market is overvalued, blah-blah. And everybody is so focusing on right now with their blinders and so caught up in this season, they're potentially risking their career, their long-term ability to deliver meaningful returns, by sitting on the sideline or selling -- you know, trading your best player because you think he's not going to have another good year. It's like selling a stock on valuation, but you know it's still a great company and it should have another great 10 or 20 years left, right?

So, I think it's too easy to get caught up in the now, and that's what goes back to the temperament, focusing on process over outcome, because especially process over outcome can keep you from making big mistakes that seem smart right now but hurt you in the long-term. And keep you focusing on what is going to deliver the best returns over time.

Sciple: I couldn't have put it better myself, Jason. I hope all the listeners enjoyed this mix of college football talk and investing, and I hope this reminds folks that you can learn lessons that are applicable in investing in all parts of your life if you just look around and pay attention.

Jason, thanks for hopping on the podcast, as always.

Hall: This was a really good time. A good show.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Heather Horton for her work behind the glass. For Jason Hall, I'm Nick Sciple, thanks for listening and Fool on!

Hall: And Go Dawgs!