Why Pro Athletes Make Awful Investors
WHY YOU SHOULD CARE
Because no one wants to hear their childhood hero asking, “Do you want fries with that?”
Consider the flood-proof couch saver. After Hurricane Katrina, professional baseball player Torii Hunter put $70,000 into a company that made inflatable rafts so buyers in flood-prone areas could float their furniture to safety. The endeavor sank.
Despite losing big on the deal, Hunter, whose career earnings eclipse $146 million, was relatively lucky. Investing didn’t ruin him. But, as a growing number of former and current pro athletes are finding out, the types of decisions and risks that allow someone to excel in sports can prove disastrous when it comes to business.
I wanted to make a difference in the world and take a shot at getting Bill-Gates-rich.
After Curt Schilling retired from baseball, he started a video game company, contributing $35 million of his own money. But in 2012, not even a $75 million injection from the state of Rhode Island could keep the lights on. Rhode Island never recouped, and Schilling was forced to auction off a number of personal items, including his famous bloody sock, to satisfy creditors.
“I wanted to make a difference in the world and take a shot at getting Bill-Gates-rich,” Schilling later said.
The lure of getting Bill-Gates-rich through high-risk investments can tempt many people, but what makes pro athletes so much more susceptible to the ill-advised, long-shot investment?
“Presumably, you’re not only going to hit a home run on the baseball field, but you’re going to hit one on Wall Street as well,” business analyst Ron Insana said in the ESPN documentary Broke.
Except most don’t hit home runs in the business world. Instead, they strike out on harebrained schemes from strangers, mismanaged companies started by friends and family, or their own idea that nobody wanted to admit was a sure loser.
As a result, 78 percent of former NFL players are bankrupt or financially stressed after two years off the field. Within five years of retirement, 60 percent of former NBA players are in similar straits. Today’s MLB player is four times more likely to file for bankruptcy than the average American.
And with a wider array of investment opportunities paraded in front of today’s athletes, it’s getting worse. Your father’s favorite player might have lost one paycheck on a hometown restaurant or car dealership, but today’s star often prefers chic startups. For example, while playing in the NBA, Baron Davis served as an investor and co-founder for ibeatyou.com, a social networking site that allowed users to challenge each other to competitions. The site saw such little traffic, no one bothered to eulogize it when it shuttered five years later.
Athlete-investors generally don’t realize how difficult it is to beat the long odds.
As financial adviser Ed Butowsky said in Broke, “[O]nly about one out of 30 or 40 of those investments work out at all, and those are the best ones that exist in the world. What are the chances that your cousin, or your mother’s friend, has found one of those deals that is going to work out?”
And that may be the biggest problem for investing athletes: They generally don’t realize how difficult it is to beat the long odds.
Reaching the pinnacle in any sport requires a singular, borderline irrational focus and pushing one’s body past pain thresholds, repeatedly. To justify the time and effort, young athletes must eventually ignore the odds of success. And those odds aren’t just Hail-Mary-pass or full-court-shot long — but astronomically long.
Of the 100,000 high school seniors who will play football this fall, about 9,000 will play in college. Of those, 310 will receive NFL scouting combine invites, and 215 — a minuscule 0.2 percent — will make an NFL roster. Even then, the average NFL career lasts about three years, meaning that for every Peyton Manning playing 17 seasons, half a dozen retire after a single season.
The 99.8 percent of high school seniors who don’t make it to the NFL confront reality pretty quickly. But the few who are talented and hardworking enough to make it often get paychecks before reality checks. And that’s when problems escalate.
According to Ben Rawitz, a former New England Patriots employee who handles marketing and personal business for quarterback Tom Brady, several factors cause players to misinterpret their chances of business success.
“Guys are completely unaware of how short careers can be,” Rawitz tells OZY. “Part of getting where they are is thinking they’re invincible, and the psychology of the game encourages swagger, extreme self-confidence.”
Overconfidence and financial illiteracy are regularly encouraged by close associates and reinforced by amateurism. Money management is difficult to learn when you’re not working, and players training year-round under draconian high school and collegiate amateurism rules don’t exactly have time to deliver pizzas.
“They’ve never seen a dime before because they never had time to make a dime,” says Rawitz.
Additionally, hangers-on can enable and siphon. Often, Rawitz says, athletes are approached with hands-off opportunities: Provide the cash, lend your name and let someone else do the work. Surefire deals that usually backfire.
Finally, there’s the age factor. According to sportswriter Pablo Torre, “Someone who came into their fortune very suddenly, didn’t get that fortune because of their business experience and is now a lottery winner at 21 years old” is likelier to underestimate the risks, or outright ignore them.
The problem projects threateningly. Despite efforts by professional leagues to involve knowledgeable advisers, there’s worry that the proliferation of startups may actually exacerbate the number of bad investments.
After all, if you beat the odds by making it big, why can’t the flood-proof couch saver succeed too?