Wednesday, January 23, 2008

Invest in baseball player futures

You can play fantasy baseball for real now: there's a company that will sell you, as an investment, a percentage of a player's future income. If he becomes the superstar you think he will, you get rich. If he languishes in the minors, you lose.

Today, Marginal Revolution points to an investment opportunity on Indians prospect Randy Newsom.
For $20, you get a claim to 0.0016% of Newsom's future salary. If Newsom earns more than $1.25 million over his career (discounted to today's dollars), you make money.

Actually, Newsom owns the company that you contact to make the deal. He's trying to make this work as a viable business, but right now he's the only player available to invest in. David Laurila of Baseball Prospectus
interviewed him a couple of days ago.

This strikes me as a great way for prospects to buy a form of insurance on their careers. It's also a way for fantasy players and baseball fans to put their money where there mouth is.

The interesting thing is how this is legal, but would be illegal if it were anyone else trying to sell a percentage of Newsom's salary as a bet. If MLB and the MLBPA wanted to legalize this kind of gambling (there's probably no reason they would, but IF they did), they would agree to sell 1% of each player into the market. If that wouldn't be enough liquidity to meet fan demand, they could then issue futures contracts that settle in cash.

And, there you go! David Ortiz futures would be as legal as corn futures.

UPDATE: According to this Slate article, your payoff is based on Newsom's *after-tax* income. Plus, there are fees on top of your $20. It looks like Newsom has to make about $2.5 million, not $1.25 million, for you to break even on the deal. As they say, be sure to read the prospectus before investing!

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13 Comments:

At Wednesday, January 23, 2008 1:16:00 PM, Anonymous tangotiger said...

Something along these lines has already happened. For example, there was the Frank Thomas bond that was paying 9% or 10% or something. So, he got his 50MM contract up front, and then he paid you some good interest. Since he had a guaranteed contract, there was likely low downside.

David Bowie also did something like that.

Whether it's an option contract, like Newsom is offering, or bonds, it's all part of the same idea: get up front cash now, in return for something in the future.

 
At Wednesday, January 23, 2008 1:21:00 PM, Anonymous tangotiger said...

Here's the David Bowie Bonds:
http://en.wikipedia.org/wiki/Bowie_Bonds

You bought the rights to his royalties for a 10 year period.

 
At Wednesday, January 23, 2008 1:28:00 PM, Anonymous Anonymous said...

You can read more here:
http://www.projects.ex.ac.uk/RDavies/arian/bowiebonds.html

 
At Wednesday, January 23, 2008 2:21:00 PM, Blogger Nate Hebel said...

The minor league baseball player seems the perfect occupation for this type of contract: Future earnings stream with a fat tail to the upside, current relative poverty of the (assumed risk-averse) player to necessitate the deal, deep statistical information for potential investors to use for asset pricing, and they're not in college (like basketball or football) so there are no eligibility issues.

I hope that the project isn't squashed by MLB...

 
At Wednesday, January 23, 2008 2:45:00 PM, Anonymous tangotiger said...

Is MLB a government now?

 
At Wednesday, January 23, 2008 4:14:00 PM, Anonymous Chris said...

Here's a similar idea but with music bands. http://www.sellaband.com/site/how-it-works.html

 
At Wednesday, January 23, 2008 4:31:00 PM, Blogger Phil Birnbaum said...

I always thought the Bowie Bonds were actually *bonds*. That is, the buyers of the bonds get 7.9% (or whatever) for ten years, and the royalties act as collateral. My understanding was that if royalties go up, the bondholders still get only 7.9%.

Wikipedia, however, implies the bondholders get the full amount of royalties, whatever that amount might be. The other site mentioned (third comment) suggests that indeed these are straight bonds, and the royalties are only collateral.

That makes sense. Wikipedia talks about ratings on the Bowie Bonds, but if the only payment due is the actual royalties, there would be no reason to rate the bonds -- they'd be more like equities.

Anyone know for sure?

In Canada, we have some income trusts ("royalty trusts") where the payout is a percentage of restaurant sales. For instance, you can buy A&W Royalty Trust units for $12.86. They pay 6% of same-store sales (currently about $1.30 a year) for the next 50 years. They are NOT bonds -- if sales go down, you get less. If sales go up, you get more. The yield is currently about 10%, which I think is pretty decent given the risk profile.

 
At Wednesday, January 23, 2008 4:33:00 PM, Blogger Phil Birnbaum said...

The "sell-a-band" project appears to give you the right to share in profits from the CD you funded. It doesn't give you a stake in any of the future earnings of the band.

So it's like you're investing in a single CD, if I read it right.

 
At Wednesday, January 23, 2008 8:45:00 PM, Anonymous Chris said...

Yes with the Sell-A-Band site for $10 you get a share of the profits from their CD for one year plus a copy of the CD itself. That's why I just said is was "similar", not exact. They seem to have done a pretty good job so far, raising $50,000 for 13 bands so far. I even bought one of the CDs so I made some profit for some band investors.

 
At Wednesday, January 23, 2008 9:20:00 PM, Blogger Phil Birnbaum said...

It's a great idea ... the fans get to support the band, and the band knows how much the fans like it, which gives an idea how good the career might be.

Do they post returns on investment?

 
At Wednesday, January 23, 2008 9:59:00 PM, Anonymous VictorW said...

Article related on a similar idea:
http://www.portfolio.com/culture-lifestyle/culture-inc/sports/2007/04/16/The-Jock-Exchange

 
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