NBA Owners and NBA teams as Investments

One of the things that's interesting about the NBA's ownership is that it's filled with guys who were self-made. So again, in that sense, most every NBA owner is a "shrewd businessman" compared to the average schmuck off the street.

However, it’s probably instructional to look at the business shrewdness that made his fortune and enabled him to buy his teams and contrast them to other guys who own teams.

Like I said, there are plenty of self-made NBA owners who made their fortunes by doing remarkable things. Mark Cuban and Paul Allen came from working or middle class backgrounds and developed computer software used by hundreds of millions of people. Jerry Colangelo was the definition of "sweat equity". He started in the basketball world as an assistant coach and worked his way up to owning the Suns and Arizona Diamondbacks. THAT is shrewdness.

In contrast, Jerry Reinsdorf didn’t really make a fortune inventing a great product people were willing to pay for, skillfully managing basketball teams, or even really managing and developing real estate (like Jerry Buss, who did a fair amount of actual development and management while starting out with a $1000 investment and very modest means). Instead, he became a millionaire by going to work for the IRS, learning how to take advantage of the tax code, and then setting up tax shelters to help folks dodge their earnings. Interestingly enough, the primary tax shelter vehicle by which he did this was made illegal by an act of Congress some 25 years ago. Factoring in the leveraged public funding he received for the White Sox and recently, the Phoenix Coyotes (itself part of a pretty large and shady set of govt subsidized real estate transactions in which Reinsdorf's son Michael had a hand in organizing), the safer conclusion is that Reinsdorf is a government made man.

Again, this isn’t to say Reinsdorf’s stupid or anything. I never claimed he was. But the fact is he made his fortune largely by taking advantage of the system, not producing a damn thing of value to anyone else. So much so that the primary means by which he took advantage of the system has been outlawed.

Now, on to the NBA. I dunno how many of you guys are familiar with one of Warren Buffet’s better quotes. “You only find out who is swimming naked when the tide goes out.”

I think Jerry Reinsdorf is very good at making money for Jerry Reinsdorf. But I do think the tide is slowly rolling out from under the Bulls. Reinsdorf owns a team in an industry and a city in which the tide has almost perpetually coming in. It’s nearly impossible for me to say whether a person is a smart, shrewd businessman who’s been given those kinds of advantages. It’s like calling you a smart, shrewd businessman because you happen to own a goose that that lays golden eggs.

That’s setting the bar for success very low. It means being a smart successful businessman means not strangling the golden goose. Or at least continuing to feed it. That’s especially true when you understand that Jerry Reinsdorf not only had the golden goose of an NBA team in a big market, he had the golden goose that was Michael Jordan.

With those endowments, it doesn’t take genius to make money. It doesn’t take risk. It’d be criminal negligence if you weren’t capable of making money. Every big market team makes a lot of money.

You might ask, well, why Reinsdorf has been so far ahead of the rest of the league when it comes to making money if they’ve all got those golden goose laying eggs? Two reasons. First, he had a second one (MJ) and a pretty large goose (Chicago) in the first place. Second, they’re playing a different game.

Face it, if you had a golden goose, you’d still want to make money, but you’d want to have fun too. You’d spend some of your money as you pleased. Say, on building good basketball teams. That's certainly what guys like Paul Allen and Mark Cuban do. And I sure as shit ain't gonna call them poor businessmen. In the middle are lots of owners who've made a nice buck while also fielding competitive teams. The Rockets, Pistons, Suns, etc.

So, while I can’t say whether Reinsdorf is a good businessman, I can say that he’s different in some crucial respects from other NBA owners. First, he’s had a lot more resources to work with, and second, he’s cared a fair amount less about basketball.

Take away the extra resources he’s had, and you’ll find that Reinsdorf is no different at all from Donald Sterling. To wit, Sterling recently said,

Not much different than what Reinsdorf has said, and in truth, they operate on a pretty similar basis.

I did a quick calculation of the basic ROI an investor could expect from the Bulls. I used 2000-2009 and took, as a rough guess, the sum of operating income and the starting and ending team values. That is, suppose you bought the Bulls, or X% of the Bulls under Reinsdorf’s ownership in 2000. They were valued at $314M. The 2009 value was $511M. Over those nine years, the Bulls generated $474M in operating income. So add together those "dividends" with the $190M in "capital appreciation" you’d get if you sold at the 2009 price, and you’ve got yourself a $671M gain on that initial investment of $314M. That’s $214% total, or an average increase of 22% per year.

Pretty cool, huh? It is. Again, I’m certainly not saying the Bulls don't turn a profit. Even in the downturn, which has beaten down the values of a lot of NBA teams (say, compared to the 2008 numbers), the Bulls are one of the leaders. But if we’re looking at the Bulls as an investment, we ought to look at other NBA teams as investments as well. And when I run the same calculations for other teams, I get pretty similar numbers. I didn’t bother to do them for all the teams, and I’d imagine they get smaller for the really small market teams, or really pathetically run teams. But anyway:

Bulls 22%
Pistons 21%
Clippers 18%
Lakers 17%
Celtics 18%
Suns 18%
Spurs 19%
Rockets 23%
Cavs 23%
Jazz 9%
Wiz 10%
Blazers 10%
Nuggets 10%
Heat 11%
Kings 11%
Knicks 7%
Mavs 7%

Yes, the Bulls have been a very good investment over the last several years. On the other hand, successful teams and lucky teams have been tremendously and similarly profitable. So has similarly close to the vest loser Donald Sterling and his Clippers. Even teams that have spent and occasionally lost outrageous sums of money have generated what we’d consider very good returns compared to what you might get from the the stock market.

I’d interpret the evidence as saying, yes, obviously the Bulls can be successful (given their past) by being cheap. As I’ve been pointing out though, the Clippers have been successful using a very similar method but without building on past success.

But the big kicker is that the success of teams like the Pistons, Celtics, Spurs, Suns and Lakers suggests the Bulls could also be successful financially by actually, ya know, trying to field good basketball teams. The fact these teams, which also have fairly successful pasts, had financial success sort of undercuts the fact that lower valued teams tend to appreciate faster.

As investments you can compare some teams to growth stocks and some teams to dividend stocks. The Bulls are very much an expensive dividend stock with a long-track record of success. They’re something like Altria. Their principle business success was decades ago, and their continued payouts are result from, in many respects, expanding their existing product into markets where no one pays attention to the fact their product sucks, and in not attempting to do much new to improve their product.

A team like the Lakers or Celtics is sort of an Intel, Microsoft, Apple or AT&T. These are companies that are, fundamentally, have been around for a long time, have reinvented their products over time to provide something new and compelling, and have grown accordingly. Generally they don’t provide the same level of dividends as a company like Altria, but they often provide some and their stock price tends to grow a lot more quickly.

The downside to the growth model is growth is really hard. For every Apple, there are a couple of Commodores, companies that made great computers 30 years ago that couldn’t succeed.

Of course, the low growth, dividend model has some serious disadvantages as well. There are basically two issues. First, you’re missing out on even more profit if you refuse to leverage your past growth into even more growth. Second, and probably more importantly, you’re basically coasting, and eventually people will move away from your product. Now if you look at Altria or the Chicago Bulls, it seems that could be a long time coming, and it could. But the fact that failure is a long-time coming and the date is uncertain doesn’t mean it’s not coming at some point.

So I guess at the end of the day, I understand the Bulls business model, and I understand why it’s successful, but it’s pretty antithetical to everything we should want as fans. And oddly enough, it’s probably not what I’d want as an investor. If I were shopping for a big market team to buy into, I’d take the Celtics, Lakers, or Rockets, probably, well before the Bulls. Because I see their management delivering both growth and profitability. The Bulls, I see them coasting, and eventually that will erode their profitability. The latest Forbes data tends to show this; they used to be the most valuable team in the league. Last year they were second. The year before, they were third.

 

The difference between the bulls and the other teams is the lack of the franchise player to build around in the last 10 years. Reinsdorf has shown he will pay for talent. He overpaid for Ben Wallace when he thought the team had a chance to take the next step. Before that he went out and signed Albert Bell. Reinsdorf has shown the ability not to spend on mediocre talent and risk future flexibility. There are only a few real difference makers. Not signing Ben Gordon, Jamal Crawford, Eddy Curry have all been the right move because they weren't guys you can build a team around and wouldn't have built the brand. If Rose develops into that frontline star, Reinsdorf will pay for the talent around him and the team value will grow at a much faster pace. The problem has been getting that central piece.

 

Brand might have been a keeper, but he was traded in the quest to make the team better, and that guy is no longer around. Artest is a special case, and Miller was probably a mistake, but he was part of the Jalen Rose trade, wasn't he? Jalen Rose is a fantastic example of why the bulls shouldn't invest in mediocre talent, the kind of mediocre talent you guys are screaming for the bulls to hold on to.

 

Let me spell it out for you Denny. The bulls would be an entirely mediocre team with BG at $11 mil / year without the cap room to even try and sign Joe Johnson. To get the cap room they'd have to move more than the one person they need to now. And why would you even do that since both BG and Johnson play the same position? Plus you're talking about something that happened 10 years ago by the previous GM. And Denny, if you think the bulls should wait around for 9 years for a guy like Crawford to play meaningful minutes then you are even dumber than I thought.

 

Yes, but that's not what happened. In fact Gordon was willing to sign for considerably less and the Bulls refused.

On the other hand, it'd be easier if they'd let Gordon accept the contract he tried to accept.

Jerry Reinsdorf is the GM of this team.

Why would we target paying Joe Johnson the max? I mean, besides the fact that Arn Tellem is Reinsdorf's buddy?

Ben Wallace Part Duh.

 

Good read, Mike!

 

AHEM, Its filled with PEOPLE.....

 

That's right. Karen Davidson is now owner of the Pistons. I've actually not been able to learn much about her, except that she seems to be a whole lot younger than her late husband was.

 

What's wrong with the Bulls in a nutshell:
1. It's not that they haven't spent money, they've spent it poorly.
2. While they spend, they are unwilling to spend any more to cover for mistakes. They'll sell productive product lines with futures because they're locked into paying unproductive product lines.
3. At the top, they appear to get personal, being vindictive and disrespectful to some folks and overly loving of others. Generally with little rhyme or reason.
4. The third point leads to a general lack of accountability within the organization.
5. Their past success and the general rising tide of the NBA has reduced the accountability they feel to the folks that buy their product.

 

Mike ,

That is an excellent piece of work

Fonzi gives 2 thumbs up

FJ

 

Well, would you rather be the Lakers or the Bulls? What I'd argue is that even though the tail is incredibly long, and you can coast for a long time, you can still do better by coasting off recent championships. Two Golden Geese is better than one!

 

The lakers are the only team that I'd want to root for if I were to take a step back and objectively pick a team to root for, and even they face big problems as Kobe declines. The argument for the C's and Rockets don't hold up. Those two aren't any different than the bulls over the last 20 years, what have the Rockets done since winning the title in '95? The C's were awful for about 15 years. I don't see this as being a uniquely bulls problem. I see it as being more of a lack of quality to invest in. The trend of players underperforming their contracts combined with the salary cap rules is creating a huge problem for teams. Even teams that go all out like Cleveland did for the last few years can find themselves with nothing at the end of the season. The problem is a lot bigger than the bulls lack instutional accountability, which I don't even agree with as a premise.

 

It's been a decade plus for the Bulls. People I teach these days don't even fully understand the MJ references I litter my lectures with. The luster will fade eventually, and it's not like the Bulls can afford to completely go el cheapo.

To some degree, they're going to be forced by the fact of having Rose to be a $60-$70M team in most years anyway. I mean, I agree with a lot of what you're saying, but if you play your cards right, you can still get to the cusp of the championship of you build right without paying the LT. And even the Bulls didn't totally ride it out cheaply. They basically spent $70M/yr the last two years and have very little to show for it. They have to spend a pretty fair amount to maintain the illusion, and they have to spend more the further they are from a championship.

 

I think you're looking at it from the wrong perspective. Winning is almost never about how much money is being spent. It almost always comes down to having the right player to build a team around. And teams almost always get that player by being lucky in the right draft. Over the last ten years, Paxson has done a pretty good job of drafting and if anything should have held off on the accountability thing until after the 03 draft. The problem was that the players over the last 10 years haven't been difference makers to this point. The players Pax inherited weren't winners and he rightly dumped them and built the 0607 team up. They showed they weren't winners and he had to tear that team back down and start over. I'd much rather have this team than a perennial second round team like the Atlanta Hawks built around Hinrich and Gordon. And while doing the rebuilding each time Pax has had to balance between maximizing for that season and for several seasons down the road. They knew BG wasn't worth the money and let him go. And when they thought they had a chance at something better, they dumped Hinrich without hesitation. So to say that money hasn't been spent well or Reinsdorf doesn't care much about winning is way off base. If anything Reinsdorf and Pax know exactly what it takes to be a winner and aren't making sentimental choices. And now they have a better balanced, improving team that still has the payroll flexibility to change the roster and add necessary pieces if the opportunity presents itself. And they start off the season as at least the third best team in the East.