This is week I saw the price of oil going negative…and it was not the most incredible thing I watched. There is this new doc on Netflix called The Last Dance (from now on TLD), which you probably saw if you are a basketball fan and should watch if you are not. Why am I talking about a sport movie in a blog on personal finance? Because I think there are some useful lessons, even if you are white and cannot jump. From now on I would assume you watched it and know what I am referring to.
In her book Thinking in Bets, Annie Duke introduces the concept of ‘resulting’, meaning we judge the quality of a decision based on results, ignoring for example how much luck plays a role in the equation or the probability distribution prior to that result. In TLD, the director goes back and forth in time, making this story look inevitable: Michael Jordan was intended to be the GOAT, look at his childhood coaches and his mentality…but was it?
Michael Jordan’s injury in his second year in the NBA
MJ breaks a bone in his right foot and the doctor told him he had a 10% chance to not be able to play anymore if he was going to rush his recovery; MJ cannot help his drive and go to train away from the Bulls: such a great player…but was it smart? Definitely MJ would not have been MJ if he did not had in him that obsession to be the best, but in this case his drive was detrimental to him and he simply got lucky. World is full of stories of promising players that did not even make it because of an injury, think of Derrick Rose if you do not want to go far from Chicago: in this case MJ risked a career for what, a sweep in the playoff against the Celtics (that drive also costed the Bulls a pick in the next year draft, an asset that would have helped further the team to win a ring)? But if you invest in start-ups you had to look for these entrepreneurs, the guys who feel invincible and go for the big kill. The attitude is detrimental for them (they have one life, if they go bust they have to restart for scratch) while you can have a portfolio of them: you need one of them to make it, to repay for all the other failures. If you look for the conservative CEO, the one that ponders on every risk and never go for it, you will have each investment with lower default risk but a portfolio that severely under-perform the risk/high reward bets.
The Scottie Pippen contract
First of all, stop feeling bad for Scottie. Pippen had the choice between a high risk/high return and low risk/low return: given his family situation, he went for the low risk one, which is FINE. He still got enough money to financially secure himself and his family, more money than 90%+ of Americans will ever see in their life, it was the right choice. Issues came because of external factors like peer pressure, the idea that you are defined not by what you do but how much you have on your bank account, which is the reason why so many people are unhappy and unfulfilled. And stop thinking that the Bulls owner was unfair to him: how many players sign a big contract, get injured and never play a minute while cashing the check? Do they offer to renegotiate lower the contract because they did not contribute to the team?
Diversified investors have the same attitude, they curse all the time the part of the portfolio that is not performing: if we are in a bull market, the regret having bonds and in a bear market they regret to have stocks. But those ‘insurances’ are there for a reason. If at any given time, all elements of your portfolio are doing fine, it does not means that you are the next George Soros, you are simply not diversified enough.
Jerry Krause vs the world
The central theme of the first two episodes of the doc was the conflict between the Bulls GM JK, the players and coach Phil Jackson. While TLD point of view is that MJ and Phil were right and JK was wrong, I think that everyone there is partially right (and partially wrong), meaning that you needed the whole bunch to win 6 titles, no one would without the others.
As proven in every NBA season, no player can win a title alone. Not MJ, not Lebron James, not Kobe. When the star player starts to collude with the ownership and push the GM to do what is good for him instead what is good for the team, 99% bad things happens, a.k.a. the chances of winning get lower, not higher. LBJ was a de-facto GM and coach in Cleveland and they were one kick in the nuts from Draymond Green away to win zero rings.
The coach needs a competent GM to build for him a team capable of winning a championship. Jackson in LA wanted to trade away Kobe and keep Shaq as the focal point of his project. And all the disasters Jackson made after leaving LA prove that he was not able to even put together an above 50% winning season without an NBA history Top3 player in the roster.
Krause is right when he demands at least as much credit as the others. Yes, he could have swallowed MJ jokes…or MJ could have been thankful to him for giving him the chance of winning. Take again the Pippen contract: in a league with a salary cap, having a good asset as Pippen is important as much as have it at below market price. The recent GS Warriors dynasty was built on players willing to gain less than their max for the possibility of playing all together. Faced with the scenario of having to pay Pippen a most probable above market contract, Krause was right in his job as GM to try to trade him at peak value to rebuild for the following seasons; while players horizon is limited by their age (and body), a good GM has to think in longer terms… or be like the Cavaliers now. As an investor, being in love with your stocks is the same as a GM willing to pay any salary to keep his players; when an asset that you bought low goes above its intrinsic value (provided you are able to calculate it), it’s time to sell and move on. As the NBA has a salary cap, you too have limited resources in your portfolio, unless you use leverage and soon have no resources at all. And you have to accept that, as for an NBA GM, sometimes the portfolio you put together performs above your expectations and sometimes shit happens and you get back less than expected. #TrustTheProcess.
The error Krause made, as a lot of investors do, is that he wanted to be right more than he wanted to win (or make money). He wanted to prove that he could make it in his own way and in order to do it he was willing to leave at home the GOAT; accepting MJ requests, keeping Jackson on board even if he did not like him and having at least another couple of playoff trips, maybe another title, became be less important than proving to the world he was part of the reason, if not THE reason, the Bulls had six rings. Investors do the same, listening to the market and cutting losses fast is impossible when you want your investing theory to be right; selling a position is like admitting you were wrong, when the reality is that a lot of factors, luck included, can determine the fate of a trade. Even Jim Simons is right only 51% of the time, and he is the one who cracked the code of the market. Ego put JK in a very bad position, as it creates havoc to countless of traders every day.
Conclusion
All of this to simply tell you that Sam Hinkie, former GM of the Philadelphia 76ers, wrote a great comparison of investing and managing a basketball team in his resignation letter in 2016: you should read it too.
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