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)
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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.
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.”
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.
“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.
I’d feel better about buying shares of Newsom if he was taking HGH. He’s obviously going to need every edge he can get. In fact, I can’t think of a better Valentine’s present. Nothing says “I love (for) you (to succeed)” like performance-enhancing drugs!
@smperk(12:54PM)
The players get guaranteed money right now. Minor league player don’t make very much $ and could use extra cash to get ahead.
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
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?