NY Times reporter has half of a good idea

Joe Nocera, a business columnist for the New York Times (winner of  "two Gerald Loeb awards and three John Hancock awards for excellence in business journalism"), writes about owners of bad sports teams ("Big-time Losers"). And he asks a question I've wondered about:

Clearly, he’s [the owner of a bad team] not in it for the glory — there isn’t any for him. Frustrated fans call for his head. Sportswriters mock him. At times his own league clashes with him. And yet, amazingly, he holds on to his wreck of a team, year after blessed year. . . . Why does the Bad Owner seem so impervious to it all?

I think I understand the motivation to own a sports team. If you're a multi-millionaire, there isn't much left to buy. A sports franchise--say an NBA team--is exclusive. Right now they're only 30 available. So if you buy an NBA team, you have about the ultimate in an expensive, exclusive toy.

But if that team not only doesn't win, but isn't even competitive, year after year after year, why would owning it be fun? So Mr. Nocera is asking an interesting question.

Unfortunately, his answer is not so interesting:

Actually, there is a reason, a very good one. To own a franchise in any of the three major sports — football, baseball or basketball — is to enter a club in which it is nearly impossible to come away a financial loser. If you doubt me, direct your gaze toward Los Angeles, where the granddaddy of Bad Owners has presided over one franchise for nearly three decades. I mean, of course, Donald T. Sterling.

Nocera states that Mr. Sterling bought the Clippers for $13.5 million. He notes further that Forbes estimates the market value of the team at "nearly $300 million". (Nocera quotes the team president as saying that Sterling thinks the team is worth more than $300 million and that Sterling wouldn't accept even $400 million.)

O.K., but Sterling bought the Clippers in June 1981. From June 1981 to January 2008 is a span of 26.5833 years.  The compound annual growth rate that turns $13.5 million into $300 million in 26.5833 years is approximately 12.37% per year. (To get to $400 million requires a compound annual growth rate of about 13.6% per year.)

Thanks to the very valuable Political Calculations blog's "The S&P 500 At Your Fingertips", we can compute the compound annual growth rate of the S&P 500 Index between 6/81 and 1/08 (January '08 is the most recent date currently available). With dividends fully reinvested, that rate is 12.22% per year.

Granted, the stock market return is overstated in two important ways. In most cases, the dividends would have been taxed. And nobody can buy the S&P Index; at least some transactions costs will be incurred even in a low-cost index fund.

But--and this is a very, very big but--an investment in stocks has essentially zero maintenance cost. Mr. Sterling's team, for most of the years he has owned it, has been operating at a loss. The article also notes that he is currently investing in a new training facility, a facility that will cost $50 million.

Bottom line: whether one uses Forbes's $300 value or a value around $400 million, Sterling's investment in the team could well have returned less than an investment in the equivalent of a garden-variety stock index fund. Sorry, but I think the "impossibility" of  "being a financial loser" is a poor explanation of why Mr. Sterling, or other NBA owners, own bad teams. (One might argue that investing in an NBA team is less risky than investing in the stock market. But would you have thought that in 1981?)

Please send my financial journalism award c/o of the Department of Economics, NC State.

Comments

[Ironman]

Thanks for linking - I have to say that I never considered making a tool to compare the investment return of a sports franchise against the S&P 500, but it might make for a neat project!

It does occur to me though that there might be a neat way to measure the relative value of sports franchises since that seems to be a question where the Clippers are concerned: the relative prices of authentic team jerseys.

If you accept that the price of a team jersey could be a proxy for the value of a team's brand (and by extension, the team franchise), you could find the relative value of one franchise against others.

Then all you would need would be the dollar value of the most recent team sale, and maybe an inflationary factor depending upon how long ago the sale occurred (percentage changes in the prices of television ads during the "game of the week" broadcasts might be the best to use here.)

You would have to use the price of "blank" jerseys (ones without a player's name) to isolate the "star" effect. And then there's the quantity issue - I could see the jerseys for a team like the Lakers selling for lower prices because more are likely made to serve the national market. Or a jersey could sell for higher prices if the relative quantities are low, such as if a jersey design or a team is relatively new.

Maybe I'll try it for baseball. (Sorry for taking up so much comment space - I think on screen....)

[Brad Humphreys]

I have a paper coming out in the next International Journal of Sport Finance that finds a 16% nominal rate of return on the average pro sports franchise over the period 1969-2006, adjusting for differences in quality.

http://www.ualberta.ca/~bhumphre/papers/ijsf_08.pdf

Brad Humphreys

[EclectEcon]

If it's not for the money and it's not for the glory, why DO these owners own bad teams?

[EclectEcon]

Maybe, once all the accounting shenanigans are considered, they ARE in it for the money. For example, see this about the Marlin:

http://home.cabletv.on.ca/~jpalmer/Eco182/marlins.html

[JorgXMcKie]

Why not just for the exclusivity?