NBA players' financial security no slam dunk
It was a decade ago Kenny Anderson, then a Boston Celtics point guard, set a standard that has helped define the filthy-rich silliness of NBA players.
With the league two months into a lockout, Anderson lamented times were so tight, he might have to pare down his fleet of luxury automobiles.
He confided to The New York Times he owned eight cars, including a Porsche, a Lexus and a Range Rover. He was thinking of shedding a Benz.
Seen 10 years down a prosperous road, Anderson's parking garage looks downright quaint. With the average player's salary having approximately doubled in a decade to $5.36 million (U.S.), the definition of NBA excess has become, well, more excessive.
"I've seen (an NBA player) having two cars a day to drive. You know, 14 cars," said Raptors sharpshooter Jason Kapono the other day. "Think about how absurd it is. You say 14 cars. All right, you may have some kids, a family of nine. But a single guy having 14 cars?
"It's one thing if Bill Gates wants to do that. But when you're 22 years old and you don't even have kids yet, it's not good."
Kapono, then, wasn't the least bit surprised when a representative of the NBA Players' Association addressed the Raptors recently on matters of financial prudence. A statistic was cited during the meeting that startled some of the hoopsters. It was said that 60 per cent of retired NBA players go broke five years after their NBA paycheques stop arriving.
"How could that be?" said Jamario Moon, the Raptors rookie. "I don't want to believe that stat."
But that stat, used by the players' association to get the attention of young millionaires, is thought to be an educated estimate.
"Sixty per cent is a ballpark. But we've seen a lot of guys who've really come into hard times five years after they leave the league," said Roy Hinson, the former NBA forward who's a representative for the players' association. "The problems are, for a lot of guys, they have a lot of cars, they have multiple houses, they're taking care of their parents. They're taking care of a whole host of issues. And the cheques aren't coming in anymore."
Experienced players like Kapono, who has played on four different teams in his five-year tenure, were not surprised by the number.
"You see how guys live," said Kapono. "A lot of players get in trouble because they want everyone around them to lead the same lifestyle. So you fall into a hole. You buy this big house now for those people, and they no longer want to drive the low-end car to go with the big house. So the big house leads to the big car, to the better clothes, to the better restaurants and stuff. It's a snowball effect. That's why the stat isn't as shocking, because I've witnessed it."
It's not just the spending, it's the scamming. Hinson – who, as it happens, said he knows of a current NBA player who owns 15 cars – said unwitting athletes have been charged as much as $5,000 a month for bill-paying services and as much as a $100,000 to have their taxes prepared by unscrupulous agents and business managers.
"If you never check up on someone," said Raptors guard Darrick Martin, "you become a target."
Public stories of NBAers in financial trouble occasionally make headlines. Back in October, Jason Caffey, who made an estimated $29 million during his eight-year NBA career, was in bankruptcy court seeking protection from his creditors, among them the seven women with whom he fathered eight children. And late last year Latrell Sprewell, who famously turned up his nose at a $21 million contract offer – "I've got to feed my family," was the money quote – had a yacht worth more than $1 million repossessed.
Hinson said the problems go far deeper than the headlines. The players' association has long recommended a financial firm that offers players free second opinions on their financial particulars, but getting players to act is a challenge.
"Sometimes you can stop the bleeding, and other times you can't stop the bleeding," said Hinson, who added that many players associate with "too many `yes' people."
"Sometimes you need someone to say, `No, you can't buy that.' I fell prey to that myself, and I know a lot of people I played with who had the same problem," said Hinson, whose 10-year career ended in the early 1990s.
"It takes a strong constitution and a good team of advisors around you to make sure you're doing the right things."
Common sense and honest advocates are sometimes in short supply in NBA circles, but they do exist.
"My approach is I want to enjoy my life for the long term, and I want my family and my kids to be able to enjoy it," said Kapono, 26. "So there's a fine line between extravagance and having fun and enjoying it at a reasonable rate.
"Going above and beyond isn't worth it. I don't want to be a part of that 60 per cent that's in trouble five years down the road. It's a short career and I'm blessed to be earning a great salary playing basketball. But if it ended, my contract only takes me to age 30. Life expectancy is 80-plus. So I've got another 50 years.
"Do I really need to buy another car?"
Friday, February 15, 2008
Sunday, February 3, 2008
Investing in Diamonds...Baseball that is
Have you heard about this? Cleveland Indians minor league pitching prospect Randy Newsom is securitizing himself by selling off 4% of any future major league earnings he may realize. For $20 you can buy one share which entitles you (the shareholder) to 0.0016% of his big league earnings. By doing this, Newsom will raise $50,000 in capital. He has even established a company to facilitate future transactions - his own "investment bank" if you will.
The best discussion I have read about this is from Steven Levitt of Freakonomics fame. Professor Levitt conjectures that, assuming Newsom is risk neutral (a big “if” by the way), this price implies Newsom believes his future earnings will equal less than $1.25 million. I just wonder what is going on; if Newsom is simply in need of cash now or if he doesn't think he has a shot at the big leagues anyway. After all, there is enormous information asymmetry between Newsom, effectively the owner-manager, and the shareholder, so I assume we are adapting an extremely high expected return to our valuation. Alternatively, maybe he is most interested in the business and is using his own "stock" to help launch it, also a good way to hedge the possibility of never making the bigs.
I know that if I were a minor leaguer and could accurately assess my own probability of major league success, this scheme would have enormous appeal. Just think about the earnings differential between minor league and big league baseball. I mean, to a 25-year old who has spent his career playing minor league ball $50k is quite a bit of money, but to a millionaire superstar, the 4% of his million dollar salary is comparatively insignificant.
Here is Professor Levitt's discussion:
January 28, 2008,
With the Stock Market Down, Perhaps Diamonds Are a Good Place to Invest
By Steven D. Levitt
Not the sort of diamonds you wear on your finger, but baseball diamonds.
Randy Newsom, a minor league baseball player, recently offered himself up as an I.P.O. Interested investors can buy up to 4% of his future major league income. The price is not that high: $20 per share, with each share entitling the owner to .0016% of his potential major league earnings. So the total revenue he will raise in return for 4% is $50,000.
What does this tell us about the 25-year-old major leaguer? If he were risk-neutral, it would tell us he expects career earnings of less than $1.25 million (which is the expected value implied by selling his future at this price). Given that the minimum salary of a major leaguer is nearly $400,000 a year, and the median salary is about $1 million, the price does not seem very high. This means either that (a) Newsom is very risk averse (which might make this a very good investment opportunity); (b) Newsom is very dumb and is pricing himself too cheaply; (c) Newsom knows that he does not have the talent to make it to the major leagues (in which case he is probably very smart).
My first thought is that option (c) is the most likely scenario. Here is a description of some of his exploits:
In 2007, Randy had a dominating 1.50 E.R.A. in Advanced-A Kinston. He was quickly promoted to AA and was selected to the Eastern League All-Star Game in July. For the season, Randy went 4-1 with 18 saves and an outstanding 3.12 E.R.A. as a closer for the Southern Division champion Akron Aeros.
After quickly establishing himself as a prospect in the Indians’ farm system, Randy was invited to play in the Arizona Fall League. The A.F.L. is the top winter ball program in the country, only available to top prospects. After throwing a hitless first inning in the A.F.L., Randy continued to dominate other top prospects, throwing seven scoreless innings in the A.F.L., including two scoreless innings in the championship game. For the entire 2007 season, Randy went 4-2, with 18 saves and a 2.51 E.R.A.
Those sound like pretty good numbers to me. Perhaps some blog readers have sabermetric models that can inform the rest of us about Newsom’s chances of making it to the major leagues?
I’m always suspicious of people who are trying to sell things, especially when they provide a lot of private information. What are the advantages of selling shares to the public rather than going through more traditional risk-pricing mechanisms like Lloyd’s of London? The fact that Newsom’s shares are not exactly flying off the shelves furthers my suspicions; 2,319 1,345 [additional press coverage here -Ed.] of the original 2,500 shares are still available for purchase.
On the other hand, there is a brilliance to Newsom’s strategy and what the web site RealSportsInvestments.com is trying to do generally. What they are selling is not just a flow of future earnings, but a dream. There are very few forms of investment that are also fun: owning a race horse, collecting expensive art, etc. Investors should be willing to accept a lower return on their investment in return for having fun. Selling a small share of himself probably doesn’t diminish the fun of pursuing the dream for Newsom (maybe it even enhances it because now he has an army of supporters rooting for him), but it gives him a way to charge others for living vicariously through him. Thus, there are potentially large gains to be made in allowing fans to own pieces of players.
While absent in team sports, this sort of staking relationship is common in other settings. Many high-stakes poker players are staked, with others buying a piece of their action. When professional golfers first make the P.G.A. tour, they often have backers who pay their expenses in return for a share of earnings. I even had a friend who bought a piece of a professional bowler.
Given how much time and energy millions of Americans devote to fantasy baseball and football, taking real ownership in players seems like a logical next step.
Maybe I’ll buy a few shares. After all, the guy has a submarine delivery.
The best discussion I have read about this is from Steven Levitt of Freakonomics fame. Professor Levitt conjectures that, assuming Newsom is risk neutral (a big “if” by the way), this price implies Newsom believes his future earnings will equal less than $1.25 million. I just wonder what is going on; if Newsom is simply in need of cash now or if he doesn't think he has a shot at the big leagues anyway. After all, there is enormous information asymmetry between Newsom, effectively the owner-manager, and the shareholder, so I assume we are adapting an extremely high expected return to our valuation. Alternatively, maybe he is most interested in the business and is using his own "stock" to help launch it, also a good way to hedge the possibility of never making the bigs.
I know that if I were a minor leaguer and could accurately assess my own probability of major league success, this scheme would have enormous appeal. Just think about the earnings differential between minor league and big league baseball. I mean, to a 25-year old who has spent his career playing minor league ball $50k is quite a bit of money, but to a millionaire superstar, the 4% of his million dollar salary is comparatively insignificant.
Here is Professor Levitt's discussion:
January 28, 2008,
With the Stock Market Down, Perhaps Diamonds Are a Good Place to Invest
By Steven D. Levitt
Not the sort of diamonds you wear on your finger, but baseball diamonds.
Randy Newsom, a minor league baseball player, recently offered himself up as an I.P.O. Interested investors can buy up to 4% of his future major league income. The price is not that high: $20 per share, with each share entitling the owner to .0016% of his potential major league earnings. So the total revenue he will raise in return for 4% is $50,000.
What does this tell us about the 25-year-old major leaguer? If he were risk-neutral, it would tell us he expects career earnings of less than $1.25 million (which is the expected value implied by selling his future at this price). Given that the minimum salary of a major leaguer is nearly $400,000 a year, and the median salary is about $1 million, the price does not seem very high. This means either that (a) Newsom is very risk averse (which might make this a very good investment opportunity); (b) Newsom is very dumb and is pricing himself too cheaply; (c) Newsom knows that he does not have the talent to make it to the major leagues (in which case he is probably very smart).
My first thought is that option (c) is the most likely scenario. Here is a description of some of his exploits:
In 2007, Randy had a dominating 1.50 E.R.A. in Advanced-A Kinston. He was quickly promoted to AA and was selected to the Eastern League All-Star Game in July. For the season, Randy went 4-1 with 18 saves and an outstanding 3.12 E.R.A. as a closer for the Southern Division champion Akron Aeros.
After quickly establishing himself as a prospect in the Indians’ farm system, Randy was invited to play in the Arizona Fall League. The A.F.L. is the top winter ball program in the country, only available to top prospects. After throwing a hitless first inning in the A.F.L., Randy continued to dominate other top prospects, throwing seven scoreless innings in the A.F.L., including two scoreless innings in the championship game. For the entire 2007 season, Randy went 4-2, with 18 saves and a 2.51 E.R.A.
Those sound like pretty good numbers to me. Perhaps some blog readers have sabermetric models that can inform the rest of us about Newsom’s chances of making it to the major leagues?
I’m always suspicious of people who are trying to sell things, especially when they provide a lot of private information. What are the advantages of selling shares to the public rather than going through more traditional risk-pricing mechanisms like Lloyd’s of London? The fact that Newsom’s shares are not exactly flying off the shelves furthers my suspicions; 2,319 1,345 [additional press coverage here -Ed.] of the original 2,500 shares are still available for purchase.
On the other hand, there is a brilliance to Newsom’s strategy and what the web site RealSportsInvestments.com is trying to do generally. What they are selling is not just a flow of future earnings, but a dream. There are very few forms of investment that are also fun: owning a race horse, collecting expensive art, etc. Investors should be willing to accept a lower return on their investment in return for having fun. Selling a small share of himself probably doesn’t diminish the fun of pursuing the dream for Newsom (maybe it even enhances it because now he has an army of supporters rooting for him), but it gives him a way to charge others for living vicariously through him. Thus, there are potentially large gains to be made in allowing fans to own pieces of players.
While absent in team sports, this sort of staking relationship is common in other settings. Many high-stakes poker players are staked, with others buying a piece of their action. When professional golfers first make the P.G.A. tour, they often have backers who pay their expenses in return for a share of earnings. I even had a friend who bought a piece of a professional bowler.
Given how much time and energy millions of Americans devote to fantasy baseball and football, taking real ownership in players seems like a logical next step.
Maybe I’ll buy a few shares. After all, the guy has a submarine delivery.
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