A minor-league pitcher named Randy Newsom is selling shares of his future earnings. Should I invest?
Is Newsom a good buy at $20 per share? I asked Henry Blodget to act as my financial adviser. Blodget laid out our assumptions on a Google spreadsheet that you can check out here. MLB's minimum salary for the 2009 season (our guess for Newsom's major-league debut) will be $400,000 before taxes. Shareholders will be paid from after-tax earnings but before agent fees and other expenses. Let's figure that Newsom's overall tax rate is around 50 percent. Let's also give the Newsom shares a discount rate of 25 percent—an acknowledgment that investing in a minor-league relief pitcher is much riskier than, say, putting your money in Treasury bills.
Going off these assumptions, it appears that Newsom must make the MLB minimum (with regular small raises) for more than five years for total cash flow per share to approach $20. (Check out that spreadsheet here.) Considering our high discount rate, that career path would put the present value of Newsom shares at around $9. What if he makes about as much money as Chad Bradford? As seen in this revised spreadsheet, that would give the $20 shares a present value of $29. Since it's fair to say that Newsom's chance of becoming Chad Bradford is no greater than the chance he'll fail to stick in the majors due to injury, a lack of opportunity, or a lack of skill, it's hard to call the pitcher a good investment. Blodget notes that even if Newsom is an absolute star player, the value of the stock has a relatively low upper limit. Compared with a business, which has a theoretically infinite lifespan, a "human professional baseball career" only operates for a finite (and short) amount of time. "Given the likelihood that he'll get hurt or flame out or just be average, I can't say I'm jumping up and down to be the first to buy," Blodget says.
Speculators probably won't have any interest in a sports exchange that peddles bad investments. But perhaps Real Sports Investments isn't really comparable to a stock exchange. In its current form, as a venue for needy minor leaguers to solicit contributions from fans, a closer analogue is Kiva, the popular Web site that connects microlenders to entrepreneurs in the developing world. Kiva has become a success by giving lenders a personal stake in the people they're helping—say, a woman selling used clothing in Uganda—by documenting their stories and posting their photos. Real Sports Investments could work in the same way, with fans choosing players who appeal to them based on their particular needs (say, a newborn to support) and career goals (I'd send a few bucks to anyone who wants to lead the Mets to the promised land).
Newsom doesn't think of himself as some kind of charity case, but he does see his $50,000 windfall as a way to level the playing field against guys who don't have to worry about finances. He told me that he wants to invest the money he gets from investors back into his career by enrolling at Athletes' Performance, a training facility in Arizona. It's performance enhancement, without the drugs.
While a savvy investor would probably short his Newsom shares, I'm guessing there are plenty of sports fans who'd be willing to support him regardless. Take me, for example: After a few minutes talking to Newsom, I forgot that the point of this whole thing was to make money. Instead, I got caught up in Newsom's dream to win a World Series. It would be a lot of fun to be even 0.0096 percent of making that happen.
Update, Feb. 2, 2008: I no longer own a professional baseball player. In an interview in Friday's New York Times, Randy Newsom said he'll return the $36,000 he earned from selling 1,800 shares—six to a Slate investment group—in his future major-league earnings. Newsom and his company, Real Sports Investments, neither registered their offering with the Securities and Exchange Commission nor sought approval from Major League Baseball before issuing the first-ever baseball player IPO. "We want to pause to hear everyone's concerns," Newsom told the Times. "This idea is not going away. This is assured by the amount of fan support, and the amount of players we talked to, that the support is there. The spirit of this idea will go on."
Are these assumptions about Randy Newsom's career all wrong? Send your breathtaking economic models to firstname.lastname@example.org. (E-mail may be quoted by name unless the writer stipulates otherwise.)