With the Stock Market Down, Perhaps Diamonds Are a Good Place to Invest

Not the sort of diamonds you wear on your finger, but baseball diamonds.

Randy Newsom, a minor league baseball player, recently offered himself up as an I.P.O. Interested investors can buy up to 4% of his future major league income. The price is not that high: $20 per share, with each share entitling the owner to .0016% of his potential major league earnings. So the total revenue he will raise in return for 4% is $50,000.

What does this tell us about the 25-year-old major leaguer? If he were risk-neutral, it would tell us he expects career earnings of less than $1.25 million (which is the expected value implied by selling his future at this price). Given that the minimum salary of a major leaguer is nearly $400,000 a year, and the median salary is about $1 million, the price does not seem very high. This means either that (a) Newsom is very risk averse (which might make this a very good investment opportunity); (b) Newsom is very dumb and is pricing himself too cheaply; (c) Newsom knows that he does not have the talent to make it to the major leagues (in which case he is probably very smart).

My first thought is that option (c) is the most likely scenario. Here is a description of some of his exploits:

In 2007, Randy had a dominating 1.50 E.R.A. in Advanced-A Kinston. He was quickly promoted to AA and was selected to the Eastern League All-Star Game in July. For the season, Randy went 4-1 with 18 saves and an outstanding 3.12 E.R.A. as a closer for the Southern Division champion Akron Aeros.

After quickly establishing himself as a prospect in the Indians’ farm system, Randy was invited to play in the Arizona Fall League. The A.F.L. is the top winter ball program in the country, only available to top prospects. After throwing a hitless first inning in the A.F.L., Randy continued to dominate other top prospects, throwing seven scoreless innings in the A.F.L., including two scoreless innings in the championship game. For the entire 2007 season, Randy went 4-2, with 18 saves and a 2.51 E.R.A.

Those sound like pretty good numbers to me. Perhaps some blog readers have sabermetric models that can inform the rest of us about Newsom’s chances of making it to the major leagues?

I’m always suspicious of people who are trying to sell things, especially when they provide a lot of private information. What are the advantages of selling shares to the public rather than going through more traditional risk-pricing mechanisms like Lloyd’s of London? The fact that Newsom’s shares are not exactly flying off the shelves furthers my suspicions; 2,319 1,345 [additional press coverage here -Ed.] of the original 2,500 shares are still available for purchase.

On the other hand, there is a brilliance to Newsom’s strategy and what the web site RealSportsInvestments.com is trying to do generally. What they are selling is not just a flow of future earnings, but a dream. There are very few forms of investment that are also fun: owning a race horse, collecting expensive art, etc. Investors should be willing to accept a lower return on their investment in return for having fun. Selling a small share of himself probably doesn’t diminish the fun of pursuing the dream for Newsom (maybe it even enhances it because now he has an army of supporters rooting for him), but it gives him a way to charge others for living vicariously through him. Thus, there are potentially large gains to be made in allowing fans to own pieces of players.

While absent in team sports, this sort of staking relationship is common in other settings. Many high-stakes poker players are staked, with others buying a piece of their action. When professional golfers first make the P.G.A. tour, they often have backers who pay their expenses in return for a share of earnings. I even had a friend who bought a piece of a professional bowler.

Given how much time and energy millions of Americans devote to fantasy baseball and football, taking real ownership in players seems like a logical next step.

Maybe I’ll buy a few shares. After all, the guy has a submarine delivery.

(Hat tip to Carl Beyer)


Eric

It seems like a good idea for him to hedge like this, even if he loses out on average. It's win-win for him.
"Go Newsom!"
"What, have you you got Newsom shares too?"

I won a few cash prizes in maths competitions in high school and one year I thought of selling shares in whatever I won. Pay $1.50 and get back 10% of whatever I won (either $0 or $3-5). I was a good chance, so any speculator would win on average, and I would get something either way. As it happened, there were no takers and I won $50.

Noah

"I don't get what the player gets out of this...he loses money."

It's almost a form of insurance -- a hedge against his future prospects. If he signs a huge contract one day, sure he loses money -- that's where Levitt's argument about having fun comes in. (Although there's something to be said for getting money now rather than later -- Google for "Time value of money".)

But let's say he doesn't make the big bucks (and it seems like most commenters agree he's not likely to)... in that case, as David in comment #3 says, the share buyer loses money, and the player comes out ahead: Not only does he get money he would not have gotten otherwise, but he gets that money now and can invest it, rather than having to wait to earn it (again, time value of money).

I think it's a pretty interesting idea and hope more players do it. Then it really would become like future fantasy baseball, only much more interesting.

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jonathan

Two points. First, the answer is in his profile; he's listed as #50 in the Indians prospects. That's pretty low.

Second, he's right handed. You left that out. Huge factor because there are spots for left-handers that aren't available for righties, the so-called lefty specialist who comes in for one or two batters. A righty reliever has to compete for a different kind of spot: no specialist, must be either -

- a long man (usually a failed starter with two or three decent pitches but not enough stuff to crack the rotation)
- a set-up guy (has at least one pitch that he really commands and good enough other stuff, but usually lacks the top end speed or a really "plus" pitch to be a closer
- a closer (usually one "plus" pitch, mostly a fastball or cutter that kills)
- a guy to fill out the roster.

He would likely be a guy to fill out the roster because he throws ground balls: need a double play, need to get some outs when you've fallen behind. Sort of a version of a long man, but without the marginal starter's stuff. The problem with a righty submariner is the ball is much easier for left-handed hitters to track. The write-up doesn't show his right / left splits, but MLB clubs aren't looking for righties to throw to only a right-handed batter or two.

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David

Looks like a bad investment to me. As 10:11 pointed out, 25 years old is old for pitcher in high-A or even AA ball. And in AA, he was hardly dominant; his strikeout rate is low and his walk rate was fairly high. As a result, he relies on his defense a lot to create outs.

Since he's a submariner, he probably has a strong ground ball rate, which usually makes it easier for his defense to turn balls in play into outs. He also keeps the ball in the yard; he's only given up 7 HRs his entire career, which is an asset.

Its possible that he could have a major league career as a "we need a ground ball" situational, later inning right handerground ball. Doesn't seem likely to me, though.

But let's assume he makes the major leagues, probably when he's 27 years old. For 3 years, he's going to make about $375,000 per year. For $20 per share, the return (@ .0016%) is $6 per share. During his 3 arbitration years, his salary would probably increase to about $1.5 million per year (reasonable for a middle reliever) - so $24 per share. Over the course of 6 years, you're almost guaranteed to lose money. The only chance you'll have to make money is if he signs a multiyear, multimillion contract - not too likely for someone whose prospects are situation reliever at best.

No thanks!

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Sean

With the stock market down, the stock market is the place to invest.

Peter

Newsom is 25, four years in baseball, and has just made it to Double A. His chances of making it to the majors for anything more than the proverbial cup of coffee are very slim.

smperk

I don't get what the player gets out of this...he loses money. Making the 1.5 mil mark isn't contingent upon his shares being sold.

procrastinating_econ

really cool post!

AaronS

Oddly enough, this is the very idea that got me started on my first billion-dollar idea...

I wasn't doing very good in the stock market, and it came to me that I was much better at determining which movies would be hits or not. And so I came up with this idea of a "Movie" stockmarket where stock could be sold in the future earnings of a movie (including things such as DVD income and other royalties).

And then my idea got bigger....

I thought, who in the world wouldn't want to invest in, say, Michael Jordan's future. Or a team's future. Or a NASCAR team? And on and on.

Of course, having no way to make that happen (and knowing it would be considered a bit "out there," I went in another direction).

I wondered why a stock investor (not a commodity investor) could only buy stock in companies such as, say, Exxon, but could not buy stock in oil alone. That is, there were no stocks that were solely dependent upon the performance of the price of oil.

Or wheat.

Or gold.

And so I came up with this idea to create stocks that tracked precisely to the value of some underlying commodity.

Well, I sent it to people around the nation and world to get their ideas. No one seemed to think it would work.

Then, 18 months later, it a stock linked to the value of gold started trading on the Australian Stock Exchange!

No hard feelings, I suppose. But now it make me think I should have followed up on that professional athlete stock exchange--ha! I think it's a WONDERFUL idea! If you need money, why not sell a piece of your future earnings?

After all, isn't that kind of what banks are doing when they lend you money for a house? They are giving you money now, figuring that your earning power will increase, and that you will successfully pay off the loan (with interest).

And isn't that what a business does when it hires someone? It believes they can make them more money than they are paying them. The company may even consider that this person will become increasingly valuable to the company.

I think it shows vision to market oneself in such a way. He has every reason to perform, and that's a good thing.

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Jess Godfrey

I'm 100% sure I read this idea from Bill James or a similar writer a few years ago as a way for minor leaguers to make money and for fans to become more involved with the game. I can't remember where, but I'm absolutely sure that this idea has been out there for the taking.

Brian

All the folks that talked about a 25-year-old in AA are on the money. It should also be pointed out that the Eastern League has a lot of pitchers' parks, including Canal Park in Akron; 3.12 isn't real impressive for a closer.

Furthermore, the Tribe's bullpen situation, while not all that great at the back end, does have a lot of prospects with potential. All of these guys are way ahead of Newsom (and younger), so he'll probably have to get moved to go to the majors.

Thirdly, to David's (#3)analysis I add this. A share represents a claim on Newsom's _post-tax_ earnings. With 40% coming off the top, the chances of this investment paying off are even less.

Chris M

The comments are right on target in regards to his ability to make "THE SHOW"..

With that said, I would focus on a few tried but true sabermetric concepts...

Strikeout to Walk Ratio
Park Factors
GroundBall Rate
Strand Rate
DIPS

Im skeptical on his ability to make "THE SHOW" for all the reasons stated above and would assume that he would be a poor risk without taking a closer look at the above mentioned factors.

Arjun

It's not a great bet b/c of the reasons provided @1 and @3. In fact, most minor leaguers are not good bets and this is probably not a good candidate for a "market."

Dan Limbach

By only offering 4%, this player is awfully confident he will make it to the big leagues and earn more than $1.5 million, else he would gladly sell a higher percent of his future earnings for cash today. Getting $300K today for giving up 24% of future earnings would be a nice nest egg in an uncertain future.

More interesting is whether he would be willing to sell 80% of his future earnings for $1 million. Most 25-year old righty minor leaguers would do so in a heartbeat.

However, with a million dollars in the bank, would the player be as hungry to get to the big leagues? If he managed to get a big contract, would he give 100% effort throughout the rest of his career knowing 80% of it is going to his investors? And would anyone invest in someone who sold that much of his future earnings?

Dan Limbach

It's been done in the music business. David Bowie sold his music rights for $55 million in 1997 to a group of bankers who issued bonds backed by Bowie's residuals. He essentially sold shares in his future earnings, just like this ballplayer is doing now.

It must have seemed less risky to invest in a proven artist, but even so, Bowies' bonds didn't make anyone rich (besides himself) and the trend did not catch on with many other artists.

http://money.cnn.com/magazines/fortune/fortune_archive/2003/08/11/346812/index.htm

Bo

Investing in Newsom could actually lower his chances of "making it big".

By getting money now, rather than when/if he gets a big contract, its less incentive for him to work harder.

That a big problem with these kind of investments, that just by the act of investment, its decreasing the chances of growth.

MRB

I wonder if MLB would consider this a form of gambling?

What 'investors' are essentially doing is wagering money on his performance - but Newsom is holding the money.

If I'm paying money for performance, why can't I double down and pay for non-performance?

Kenny

I've been thinking about this particular offer all day today though I haven't had the chance to crunch any numbers. Seeing as though he is already 25, right handed, and many other reasons listed above by other posters, I really don't like his chances of making it to the bigs. I'd say he's got a 5-10% chance of sticking in the majors for good, a 30% shot of a short-term call-up, and the rest of it, well, not so fun for investors. However, it's an easy way to make a lot of fans, or a lot of enemies at the same time.

Here's my advice. Sell some shares to Eric Wedge. If Wedge is in on this deal, he'll be in the bigs next year..as long as Shapiro is in on the deal too.

If that's not gonna happen, I'll take my $20 to In-n-out.

Eric

Just want to point out that Randy was a Tufts economics major. Just goes to prove that we Jumbos get taught well.

Mike

Seems a little hinky to me. Particularly as the illustration on potential returns "ignores transaction costs and the time value of money."

https://www.realsportsinvestments.com/Information_for_Investors.php (illustration with link to T/C)