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.