Three “Wise” Guys On: Sports & Finance
This is a collaboration project that I discussed with Michael Kelly, CFA, CFP® and Simon Tryzna, CFA in late 2020. We constantly text / call / Zoom to chat about the markets, sports, client issues, and anything else on our minds. We all thought it would be fun to collaborate on a couple of topics in an old-school Bill Simmons style column.
Simon Tryzna (ST): So I don’t know if you guys knew this about me, but in high school, I was dead set on working in some capacity in sports. The dream was to be a sports agent and be able to help out athletes with their investments, but I knew that was a long shot. I would have settled for working in some sort of finance / analytical department of any sports franchise. And while clearly I have made a much different career choice, my passion for sports finance and the behind the scenes decision making is still there.
With that backdrop in mind, I was absolutely crushed, but not surprised, that FC Barcelona mismanaged their finance situation to a point where they literally could not keep Lionel Messi in the club due to financial regulations imposed to them by the league they are in (La Liga). Before we jump into how and why that happened, financial mismanagement in other sports, and the personal financial lessons to be learned from sports, I wanted to ask you guys this: how did you feel about it initially when learning that Messi would no longer be a Barcelona player and instead join Paris St. Germain?
Matthew Ricks (MR): I think most sports fans dream of working in sports at some point. After my dreams of playing in the NBA were quickly dashed mainly due to genetics (thanks Mom & Dad), I grew more interested in how to build a successful team. It certainly helped that around this time my beloved Knicks were experiencing a renaissance and built a successful team with major contributions coming from a former grocery bag boy in John Starks (obligatory link to The Dunk) and two of the largest humans I’d ever seen in Anthony Mason and Charles Oakley.
I’m fortunate to have a family friend who works in the NHL league office and in college I talked with them about how I could break into sports. Their reply was that most front-office jobs were going to require a law degree and if I wanted to go down that route, they would help. Law school was not of interest to me so I stuck with finance. While working for JPMorgan, I thought I struck gold when I learned of the sports finance team. Their main role is financing the purchase of a team or the building of a stadium which would mean either a law degree or being super into reading a lot of debt covenants. That officially put my dream of working in sports to bed.
Do you know what’s better than working in sports though? Being an owner.
I thought the whole thing with Barcelona was rather Messi (#DadJokes). Bad puns aside, I am still 100% clear on what the La Liga financial regulations are meant to accomplish. The best I understand it as a soccer n00b is this is a quasi-salary cap in an effort to level the playing field.
ST: So without getting too much into weeds, the financial regulations are basically put in place so clubs can’t spend more than they bring in. It’s not so much as a quasi-salary cap, but more along the lines of “forced fiscal responsibility.” As a Barcelona fan, I hate the fact that it enabled them to keep Messi, but as a financial professional, I do appreciate that they are trying to have each team effectively run a sustainable business.
MR: Ah okay. So it’s like when a government tries for a balanced budget. I’m sure this will be as successful too...
Michael Kelly (MK): First, in terms of career path, I was in the same boat Simon. I never thought I would be in a job that didn’t have a connection to sports. I almost went into coaching right out of school, but the travel and time away from a future family wasn’t something I wanted. Then being from Connecticut I actually interviewed at ESPN for an analytics role but didn’t pass the qualifying test (I forgot that Jason White of Oklahoma had won the Heisman in 2003).
ST: Don’t let Jeff Chapman know that…
MR: *Makes mental note not to have Mike on his sports trivia team anytime soon*
MK: I then ended up working as a production assistant on major movies through a connection thinking that it could help me land at an agency and eventually I’d make my way to sports. Clearly none of those routes panned out, but sports are still a passion of mine - sometimes too much my wife would say.
As far as the Messi situation, I fall in between the two of you in terms of knowledge of the situation. I understand the basis of financial fair play (FFP) but I get lost in the details. I enjoy that they don’t operate on a strict salary cap the way American sports do but I hate that the rules are so weak that a lot of the big clubs can find loopholes to get around them (or face such minor penalties it makes breaking them worth it - see: Manchester City).
What always amazes me with soccer in particular (and there are parallels we can talk about with other sports later) is that many of the folks that run the operations of the clubs are objectively smart people and yet they continuously over-spend in ways that put them on paths to disaster. Barcelona isn’t the first club to face this situation, it's just they didn’t have a white knight buyer to come in and clean up the clubs financial troubles (again see: Manchester City).
ST: Mike - please tell me more about your affinity for Manchester City ha ha.
MK: Wildly City isn’t even my least favorite. Don’t even get me started on Chelsea (I think I just shed another tear thinking about Stevie’s slip to Demba Fucking Ba).
ST: In all seriousness though, I do love the parallels between soccer and personal finance. The Barcelona situation is a prime example of poor cash flow planning. It’s incredibly easy to take on debt and leverage up, but when that goes away and you’re faced with the repercussions, it could be completely devastating. I’ve had experiences with clients that got into those situations that it took a lot of work (and some luck with their company going public) to clean up. And even though a lot of people will say “see - debt is bad!,” I’m a strict believer that with proper cash flow management, debt can work really well for people (and soccer teams). Barcelona clearly botched this. I hope you (the reader) don't. Know your income, know how much debt you have, and have an emergency fund and a plan in place to pay off the debt should something happen to your income stream.
MR: For a lot of people it’s tough to ignore the Dave Ramseys of the world who are out there shouting about how all debt is “bad”. When in actuality there are many situations where debt can be beneficial. Let’s say you own a business and need additional capital. If procuring a loan with an interest rate of 5% allows you to grow your profits by 10%, isn’t that a net positive? You can equate that same idea to student loans whereby borrowing the money you are enhancing your career prospects. At least that used to be the case. We can go further into student loan debt in another post.
Granted it may not always work out like that all the time so proper cash flow management becomes imperative. You do not want to take on an amount of debt where the payments become burdensome.
MK: Taking things out of soccer and into US sports, I am constantly dumbfounded by both basketball and baseball.
Basketball is the sport where I always get a kick out of the moves made by the GMs. Time and time again they hand out their massively large contracts to these journeymen role players. The GMs come into their new role and are immediately pressured (by fans and/or owners) to make splash signings and change things around immediately. Even if they know it’s not the way to build a contender, they spend money on guys right away and lock them up for future years despite knowing they don’t want them around long term. That is why as bad as people make fun of Sam Hinckie and what he did with the 76ers, I do have respect for him. He was the first to embrace a long term process and built a marketing gimmick - ‘Trust The Process’ - to get fans to buy in to them losing for a few years. That gave him time to build in a manner he thought was better. Unfortunately for him, it took a bit too long for the owners to stomach. You could argue though that it was working - and likely would have if Ben Simmons learned how to shoot. I don’t get how owners, GMs and fans alike aren’t willing to think long-term. Like investing you have to be willing to trust the strategy and be willing to take some bad years knowing that in the long term it's better for you.
ST: Shameless plug for my “Trust the Process” blog post where I dive deep into Sam Hinckie. The crux of my post was simple - have a long term vision and do your best to execute it. I feel like a lot of NBA organizations don’t have a game plan and are so short-sighted. And I feel like a lot of investors today have similar shortsightedness where they see what their friends are doing and are following suit, irrespective of whether that is the right move for them. Much how the Phoenix Suns can’t have the same organizational philosophy as the LA Lakers, regular investors shouldn’t be blindly following Redditors on their crusade or allocating to Crypto because Reese Witherspoon and Steph Curry are jumping in. They should first build their own philosophy for what works for them and then invest accordingly.
MK: Baseball is the one that I just can’t deal with though. You guys are bigger fans of the game than I am (probably because I played a more fun sport going up - lacrosse. Matt you’ll learn to love it too moving to the island) and can probably speak better about it. But to me the game has a MASSIVE PR problem in terms of its ability to attract a younger audience and yet its response is to hand out more lucrative and longer contracts (of which all of it is guaranteed) to players that are flat out boring.
And yes Matt I know Mike Trout is a NJ guy but the guy is vanilla ice cream.
In what world does that make sense? They refuse to adjust course and are so stuck in their ways. As investment managers we rarely still throw 30-70 portfolios out there as a good option merely because they performed well in the early 80s. We adapted based on the new information out there. Yet baseball still operates under the same philosophies and hangs its hat on being ‘America’s Pastime’. Adapt or die is what I say.
ST: That’s an incredibly strong take there Mike. I love baseball, but I hate MLB. I think it’s incredibly important for all of us to adapt our thinking to market realities. One of the areas where I constantly struggle with is determining expected returns for a portfolio for a financial plan. While it’s incredibly easy to use historical returns for asset classes and then portfolio weights to determine portfolio expected returns, the reality is that it’s not that quite simple. The world was different 20, 10, and even 5 years ago and our investment philosophies and expectations should match that. Just how MLB needs to adjust their marketing efforts to the modern fan, advisors and investors need to constantly adjust their expectations and portfolios to account for structural changes in the world. And I’m not advocating for daily, weekly, monthly, or quarterly changes. But on an annual basis, take a look at the data, the macroeconomic picture and see if your investment outlook needs to change and if your portfolio needs to account for the changes to your outlook.
MR: Whoa, spoilers on my move to Strong Island. Also, Trout is from Millville, NJ which is DEEP South Jersey so basically Philly / Delaware.
We’ve talked a lot about finances for the teams and franchises which is basically corporate finance and not as relatable. I want to pivot back to personal financial planning by talking about the athletes. Let’s ignore the superstars for a moment and instead focus on the players who are at the end of the roster.
First some statistics. The average career for a player in the four major US sports is less than 7 years. The minimum salaries range from $570,500 to $925,258 based on the respective collective bargaining agreements. Compare that to the typical US full-time worker who has a period for peak earnings of approximately 10-15 years and who had an average wage and salary of $71,456 in 2020.
Now some math. Let’s say you are an MLB player who makes the minimum salary and spent the average career length in the majors starting at age 22. After you’re done with baseball you get a job making the average wage and salary until you retire at age 65. Your career earnings would be over $5 million. Compare that to someone who graduates college at 22 and makes the average wage and salary until they retire at 65. They would have earned over $3 million for their career.
You’re probably wondering where I am going with this. Well earlier you both mentioned time horizon and adapting. Let’s start with time horizon. What did the baseball player do with the difference in earnings? Hopefully, they received good advice from a professional and smartly invested it. This normally would be where we show the wonders of compounding and add a chart about how if you invested the difference at a 12% return (shoutout to the Friday crew) it would have grown to $X amount. I do not think that’s necessary though. Now for adapting. During their playing days did the player live a lifestyle they could not maintain afterward? That could make a massive difference to their financial well-being.
ST: I think that’s an incredibly good point Matt about just how powerful professional sports can be from changing the livelihoods of all athletes - not just the stars. But, like the front offices that pay them, the individuals need to have a strategy for their assets to ensure that they maximize the probability of a successful financial outcome for the rest of their lives. And this is where I feel like many fall into a trap and squander their assets on a lifestyle that is outside their means. As I type this, that sounds incredibly like what happened to FC Barcelona...
This was the fourth installment of Three “Wise” Guys On. We look forward to bringing you more of these in the future so stay tuned and give us a follow on Twitter: @SimonTryzna, @the_MikeKelly, & @MatthewRicks_
Disclaimer: This post is for educational, informational, and entertainment purposes only. Consult your fiduciary, tax, legal, and other advisors before making any decisions regarding your financial plan.