Investment Purposes and the Padres

When I work with individual investors, I am often asked questions like, “What should I invest in?” It is good and even admirable that such a question is asked.  Investing is that important.

But there are other important questions that must be dealt with first.  These questions relate to matters of risk and risk capacity, psychology (and risk tolerance), expectations, time horizon and need. But the first question — a question sometimes even overlooked by professionals — is the objective of your investment.

Your objectives will (or should) determine nearly every action you make with respect to finance. It is imperative that you determine the reason for each investment first and foremost. What is the investment intended for? What do you wish to achieve in making such an investment? Is it for retirement, the future education needs of your children or grandchildren, the purchase of another asset (such as a home), some general fund, or another purpose? Knowing what your objectives are will help you to make appropriate choices.

I have caught myself ruminating on this question a lot since it was announced last week that three candidates have been selected in the bidding to purchase my hometown San Diego Padres.  These prospects include groups led by Peter O’Malley, former long-time owner of the hated Dodgers, whose group includes local golf star Phil Mickelson, Steve Cohen, the multi-billionaire hedge fund investor who was one of three finalists bidding for the Dodgers before their recent sale, and movie mogul Thomas Tull, whose Legendary Pictures has produced such box-office successes as “Batman Begins,” “The Hangover,” “300,” “The Dark Night” and “Inception.” Tull has partnered with Mr. Padre (and the nicest guy in San Diego based upon my encounters with him), Hall-of-Famer Tony Gwynn.

The sale price is expected to be significant in light of the recent sale of the Dodgers for an amount in excess of $2 billion and the team’s new $1.2 billion television broadcast deal with Fox that includes a share in a new regional sports network, even though my cable company (Time Warner Cable) hasn’t yet seen fit to make it available to me as part of my premium — and very expensive — cable package.

Based solely upon local chatter, Tull seems to be the early fan favorite, in no small measure due to Gwynn’s involvement. As for me, I have no opinion on the matter, at least until I get an understanding of each investor’s investment objective in buying the Padres.  Any prospective purchaser out to maximize investment return will not have my support.

Let me explain.

The current business model for Major League Baseball makes no sense.  Unlike (for example) the NFL, baseball has very limited revenue sharing, which means that the Padres cannot hope to compete financially or consistently with “big-boy” teams like the Dodgers and Yankees.  It’s great that the Padres’ new TV contract is worth $1.2 billion, but the Dodgers’ will be worth more like $4 billion.  The Padres can hope to contend by being smart, building a strong farm system to capture good talent early (before it becomes unaffordable), focusing on unique attributes (pitcher-friendly Petco Park, for example), and being lucky (unlike this season, with 13 Padres on the disabled list), as luck always plays a part in athletic success. But they simply cannot expect to contend all the time, despite my hopes to the contrary. Their margin for error is much too small (they can’t buy their way out of mistakes).

Many fans don’t understand this reality or forget it in the midst of a disappointing season.  But it is unreasonable to expect a sports team owner, even a very rich owner, to keep losing lots of money.  Moreover, the local public has a fair amount of distrust for current ownership on account of the perception in many circles that more was promised in the way of investment into the team in order to obtain public financing for Petco Park than was ultimately delivered. While I believe the current management is on the right track (despite this season’s results), new ownership is surely needed.

However, since the Pittsburgh Pirates have already demonstrated that losing can be very profitable, I want to be certain of a prospective new owner’s intentions before I offer my support (not that it’s needed or even desired).  As David Berri, president of the North American Association of Sports Economists, notes, “Teams have a choice. They can seek to maximize winning, what the Yankees do, or you can be the Pirates and make as much money as you can in your market. The Pirates aren’t trying to win.”

Since there is a clear limit to the revenue small-market teams can produce (despite the increasing value of TV deals), spending more to win can significantly impair profitability. Stanford Economist Roger Noll explains: “Probably the Pirates would be less profitable if they tried to improve the team substantially.”

Clubs higher up the food chain have more revenue opportunities — more upside potential – making winning both easier and more profitable. Simply put, I don’t want the owner of the Padres looking to maximize profit on his investment. I want a commitment to trying to win and trying to win consistently. I don’t expect the Padres owner to lose money and to keep losing money in order to win, but I don’t want profit maximization either.

Looked at within the context of investment objectives, not seeking to maximize profit is not as counterintuitive as some might think.  Other, perfectly appropriate investment objectives can support good baseball in San Diego (which I define as being consistently competitive with occasional opportunities to win a World Series, the most for which I think we can reasonably hope).  These include ego (think Dallas Mavericks owner Mark Cuban). Mark has plenty of money and is more than willing to part with some of it in the interest of winning so as to support his ego (which I do not disparage and which this picture exemplifies beautifully). Both Cohen and Tull could fit into this category.

Another investment objective I could get behind is legacy. No matter how much money one makes or even how much money one gives away, the connection between sports teams and their communities provides unique opportunities for owners to make (or redeem) and leave a lasting legacy.  Bob Kraft has demonstrated that a sports team can balance to goals of winning and financial success; be is and will, I suspect, always be beloved in New England for what he has done with and for the Patriots.  The Irsay family was reviled in Baltimore for backing up the moving trucks in the middle of the night, but has built an extremely positive legacy in Indianapolis with the Colts (at least in part due to the differences between former owner and father Robert and his son Jim, the current owner). 

Such a legacy can be extremely valuable, if not monetarily.  O’Malley might fit well into this category, since he has been extremely critical of subsequent Dodgers owners. I’m concerned, however, that he won’t have the capital necessary to compete, as his family said they sold the Dodgers nearly 15 years ago because they could no longer afford the baseball business. Any financial pressure would provide an incentive to maximize profit, even if/when doing so is a detriment to good baseball.  Of course, the investment business and the movie business are both highly volatile, so we will have to bear some risk with any of the current ownership prospects.

I am convinced that the Padres need new ownership.  The current owner wants to sell.  Some people with serious money want to buy.  I am thus cautiously optimistic about the future of good baseball in San Diego.  But I wish all potential candidates to buy the team would make their investment objectives clear as I want and expect a serious commitment to good baseball in San Diego. 

Even more, I wish there were a way that we could hold them to the assurances I fully expect they would make.

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6 thoughts on “Investment Purposes and the Padres

  1. Investment objective … most people don’t really know what their’s is. It is our responsibility as a financial advisor to get help the client (or potential client) get to the root of their objective. This comes through questioning, discussion, explanation, education and experience. There is no single right objective … and, while there may be an overall objective, there are different objectives for each investment. As a professional it is my responsibility to help the client truly understand what their overall objective(s) is(are) and then offer a variety of options of how to acheive them. There is no “sales track”, there are no preconcieved ideas, there is no product or products that are the “solution” for everyone. As a financial advisor I need to constantly battle the desire to shortcut the process. I have built a close raport with most of my clients and it would be easy to make a recommendation and move forward, but I stop, and take the time to go thru a give and take educational process to make sure the client understands the why’s, the options available, the costs, the risks, etc, on each investment we discuss.
    So, its not a simple thing, and normally we like to simplify. But if I’m going to do the right thing for my client we must truly find the investment objective each time.

    Bob Fagan

  2. Having a goal is always important. Helping people to understand and achieve their goals is important. But this cannot be done outside of the context of a relationship. A financial advisor cannot know how to help a client achieve their goals unless their is a relationship, unless their is trust.

    As for the Padres, San Diegans aren’t inclined to trust an owner, because we haven’t had one who is willing to commit to winning. There aren’t many San Diegans who expect us to compete with the Dodgers or Yankees or Red Sox financially, but you’re right–we do want to be competitive. Hopefully we’ll end up with an owner willing to commit to earning that trust. Just like (one hopes) financial advisors will commit to earning the trust of clients rather than just trying to make a quick buck–because, as you pointed out, there is more to life (and investing) than a quick buck.

  3. Bob –

    You mention profit, ego and legacy.

    I discount legacy because you could count on your fingers the number of long-term owners professional teams that have built a legacy or community asset outside of a major media market (Green Bay immediately comes to mind).

    Check out the “most awesomest sports championship map ever created” via Slate.:
    http://slate.me/J3ZQjq

    What is striking is how few championships have been won outside of major media markets. If you eliminate Stanley Cups won by Montreal, Edmonton and Toronto, Super Bowls by Dallas and S.F., and NBA Championships by the Celtics (and allocate the Minneapolis Lakers Championships to L.A.), it becomes apparent that hardly anyone outside of NYC, LA and Chicago ever wins anything.

    I think ego is sort of a side benefit of owning a sports team. Along with this comes the psychic benefits of being an owner, even if you do not have ego. Owners can be such kids (in a good way) about owning teams.

    That being said, the primary motivator is still profit. To be more precise, operating profit is highly variable and requires a tough balancing act between spending and frugality as you mention, as well as a huge dose of luck. But there are oh-so-many more ways to profit from owning a sports team. The tax benefits alone are huge. I am not an expert in this area, but I know that the majority of the cost of acquiring a team is allocated to payroll, and payroll is allowed to be amortized and depreciated on an accelerated basis as a wasting capital asset, unlike other industries. The media contracts are also depreciable, while teams are allowed to play games with the annual revenues from media sharing. Pension plans, etc. etc. The list of tax breaks is apparently massive,and sports franchises make amazing tax shelters. Sorry, I can only come up with a couple dated articles on this point (ca. 1975), so I am not going to link them.

    Then you have the appreciation side. Team owners get to benefit from playing in government-build and rent-subsidized facilities where they often control all revenue sources. There are often . A new stadium is often only a decade or two away, with a huge boost in team value when it happens. While this is contrary to my other postings (that trees do not grow to the sky), it seems that sports franchise values only go up (until they don’t, I guess).

    You often have billionaires vying to buy sports teams. They are usually self-made men (and in some cases women) who were not fools in business. It is dangerous to assume that they were fools getting into the sports business simply because it mixes a passion with their business interests.

    Although there have been notable exceptions, the TV-era sports business has been “berry, berry good” for the owners on entry and exit.

    Good luck with getting good ownership for the Pads. Gwynn was one of my favorite players, so I’ll be rooting for him.

  4. Thanks (again) for posting. Tony Gwynn lives about a mile from me and our daughters played against each other in basketball for rival schools through the middle and high school years, so I have seen him “out and about” many times. He has always been a delight. It isn’t often that that happens with the famous (at least in my experience).

    • That is awesome. We had our very similar hero (Puckett), with two World Series championships to boot, but he unfortunately sort of sullied his reputation in the end. Times have changed, but it was nice when you could expect players to spend most or all of their careers playing for the hometown team, even if it is not in NYC, LA or Miami.

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