By: @JuveEnnio
Football teams are horrible “investments”. Many would argue but when if I measure them against what I would qualify as good investment, they fail tremendously. When I was younger was younger I wanted to grow up to be a Baggio, but now I want to be Gianni Agnelli, at least in terms of owning a team. I would have said either Andrea Agnelli or John Elkann if it were not for the fact that I am older than either of them. But if you ask me now who I want to be when I grow up, the answer is Warren Buffett and not for the reasons of wealth but in order to possess the savviest investing mind the world has ever seen. This piece is a combination of my fascination with Buffett’s teachings and my love of the fame of football.
Parma’s recent bankruptcy and relegation is one in a long line of Italian teams which has suffered this fate; even a club as large as Napoli fell victim to this not that long ago. The high valuation of come clubs might refute this claim, but if you follow the logic you will see that an investment is not based on the growth of a club’s value, just as a good investment is not necessarily based on the growth of a company’s value. Let’s examine Chelsea which Roman Abramovich purchased for an estimated 140 million pounds. Twelve years later the team is valued at 800 million pounds. Taken in isolation, this would appear to be a great investment however when you examine the operations of the team in greater depth it does not appear to be as good an investment.
Buffett’s makes his investments through the Berkshire Hathaway, of which he is the largest shareholder. If you examine the companies which Berkshire Hathaway owns in part or are wholly owned subsidiaries, you will find few if any high tech companies. Buffett himself has said that Bill Gates (one of his closest friends and Microsoft co-founder) is the smartest manager he knows, but he would never invest in Microsoft because he doesn’t understand Microsoft. Is that to say the Buffet is not intelligent and does not realize the total dominance the Microsoft had on the PC market up until a few years back? Is that to say that Buffett does not understand the concept of computer software? When Buffett states that he doesn’t understand Microsoft he means that he cannot predict the software market and he cannot predict how Microsoft will fit into that market in five, ten, 20 years time.
Research, Development and Innovation are the lifeblood of success and continued success in technology. If a company falls behind its competition either through incompetence of luck, their strong market position can quickly be diminished. Innovation however means one thing for certain, heavy investment capital. The landscape is littered with market leaders who are now merely also rans in the industry. Nokia, Motorola and Blackberry at one time were each the market leaders it cell phones/smart phones yet now they take a back seat to Samsung and Apple. Atari once the predominant name in gaming now makes more money licensing their logo for retro t-shirts. Commodore, Texas Instruments, Compaq, all used to make computers. Yahoo used ot be the preeminent search engine. Palm could be considered the grandfather or the smartphone. Something caused them to lose market share, be it lack of innovation, lack of vision, etc. But as an investor, you have to ask yourself if it’s work taking the risk. My Buffett doesn’t believe so. One of my favourite examples is Motorola v Hormel foods. Motorola essentially invented the mobile phone. Hormel is best known for Spam (the food, not the stuff that shows up in your inbox). One share of Hormel in January of 1979 would have cost you 39 cent and one share of Motorola would have cost you $4. Had you invested $1,000 in each, today you would have close to $150,000 in Hormel and about $18,000 in Motorola. Motorola has come off it’s all time high of $239 per share, however, had you sold then, you would have earned $60,000. The numbers don’t lie, technology is not easy to predict.
So what does technology have to do with football? Innovation in football comes in the forms of player transfers, new players equate to new technology to keep the team fresh and competitive. In the first 10 years, Chelsea spent nearly 600 million pounds in player transfers and over 1 billion pounds in player wages and overall loses of 600 million pounds as well. When you factor all of this into account, the growth is essentially nullified. The growth was purchased, not much of an investment.
At least if you invest in a company there is an anticipation of a dividend payment. These come from after tax profits and retained earnings. One would question if a football team has the funds to pay a dividend then they are not being true to their mandate, to spend and put the most competitive team on the pitch. This leads me to the next reason why a football team is a bad investment, no annual profits. I always like to look for analogies, comparisons if you will to step outside the world of football into other areas of business. For instance, assume you want wanted to buy the corner store and earn a living from operating it, you would want to know what the profit was after taxes and expenses to understand it this was the best use of your capital. Is there a substitute which would yield a higher return on your capital? Assume you were considering two stores, both are in the same business, both are being sold for the same amount, however one generates a higher net income than the other. I would recommend that better producing one for the same money, it’s better return on capital. When you make an investment, especially if it’s a stock, always look at it as if you’re buying a business and not a piece of paper, which is how Buffett approaches his purchases. If he could buy the entire company he would. Always examine if there are better substitutes for your capital. If you could invest $500,000 in a local store and it generated $25,000 net income, that would be a 5% return on investment. However, if you could find a guaranteed investment at the bank that paid anything above 5% then why not take the guaranteed investment, it has a higher return and less risk. Of course note that this is all hypothetical, the market has a way of making sure that this doesn’t happen. If two similar companies have different incomes then the one with the higher income would have a higher price. Also, you would not be able to find a guaranteed rate of return that is higher than one in which they investor has to take on risk. So a team should not have any funds left over to pay annual dividends, if you own one with the intended purpose of drawing an income from the team then you would limiting its chance for success. Therefore by this standard, it is also a bad investment. So for this reason as well, it makes a bad investment. Aside from the enjoyment you receive owning the team, it doesn’t do anything for you financially while you own it. In a way, it’s kind of like gold.
The third reason is lack of control over your environment. It’s a football team, that is what it is. Juventus cannot decide that one day it will become an accounting firm, or a law firm or make furniture. Yes brands can expand but the team will always be the team, that’s the core business. It is also at the mercy of the league to a certain extent. Have you heard the expression “there goes the neighbourhood” usually said when a bad neighbour moves in. The first thought is they are going to mess up my property value. However you can move, a football team cannot, so poor management of the league can affect the value of the team. In fairness the corallary is also true. However when you invest in a traditional business, the business can change its mandate and adapt to market conditions in order to remain a profitable going concern. IBM started life as a company that t manufactured and sold machinery ranging from commercial scales and industrial time recorders to meat and cheese slicers, along with tabulators and punched cards. I came to know it as leader in the PC market and now it no longer sells PCs and has turned to consultancy. Apple started life as PC maker, but now the iPhone is its biggest selling product and revolutionized the music industry, the film industry, the retail industry and keeps reinventing itself with rumours of an automobile in the works. They have evolved; football teams are not permitted to evolve.
The final reason is ease of sale. Football teams do not necessarily provide the best growth and they don’t provide any annual income to the owner. Ownership means locking up capital into an unproductive business for a very long time. If an owner is to do that it will essentially be “play money”. Therefore even if the someone can afford to purchase a 500 million Euro business, the question is can they afford to purchase THIS 500 million Euro business. Therefore finding buyers can be difficult. Nobody seems to be rushing out to invest in Parma at the moment. The afore mentioned reasons make teams investments that only a few can afford but also make them risky. A business that cannot easily liquidated in an inherent risk and therefore limits the possible suitors and its value.
So while some of these teams do appreciate in value, that alone does not make them a good business, there are other factors to consider. Yes I would love to own one but only if the money I would “invest” in it is superfluous and not required in other business operations.
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