There are a number of alternative investments out there. For example, you can invest in art. Back in 2008, I wrote about a company called Beauty Holding that let you invest in models. It doesn’t look like that company is around any more, so it may not have been a great investment after all.
Investing in people’s future income is an idea that has always intrigued me. A friend of mine’s father is a doctor and he used to say that he’d pay all of medical school if he could take the 9th and 10th year of earnings for a doctor. I remember him saying this around 2000, I’m not sure if the math still works out today.
However, what if we took that same concept and applied it to professional athletes (or those striving to become professional athletes)? Today I wanted to take a look at three cases where that has been somewhat possible. By coincidence, all three are baseball players. Each player’s history gives us a unique angle into how these kinds of investments can work.
Investing in Baseball Players
There is at least one place where you can personally invest in professional athletes. I don’t know how legit that place, (I only saw one athlete available), so I’m not going to include it here. More typically, some companies that already have big money are investing it hoping to strike it rich by getting a percentage of a star athlete’s future earnings.
Imagine if you had a time machine and went back to 2000 and bought 5% of Tom Brady’s future earnings. He probably wouldn’t have been selling them, but one can imagine that an investment of a few hundred thousand dollars would be worth $20 million dollars today.
Case 1: Fernando Tatis Jr.
Let’s start with the most recent case in the news. Fernando Tatis Jr. made headlines by signing a contract for $340 million dollars over 14-years. It’s one of the biggest deals in major league history.
However, when Fernando Tatis was a minor leaguer, he made a deal with Big League Advance. Big League Advance gives players around $50,000 for every 1% of their future earnings. If Tatis took the maximum money available in such a deal ($500,000) Big League Advance would $34 million dollars over the next 14 years of Tatis’ contract.
It may sound to some like Tatis got taken advantage of. However, few players make this kind of money. The salary in the minor leagues is very low. A guaranteed $500,000 at a young age could make him financially independent if he got injured and never made it to the majors. There’s another thing to note, we don’t know the exact specifics of Tatis’ particular deal. It’s possible he could have negotiated for twice the money and only gave up 3% of his future earnings.
From the perspective of Big League Advance, they are little different than a Silicon Valley incubator funding a start-up in hopes of a big payday down the line. In fact, Tatis said he used the money to optimize nutrition, hire better trainers, and create a better practice environment.
This is fine for Big League Advance, but it doesn’t help the average person, you or me, to invest in a professional athlete. Maybe someday they’ll become a publicly-traded company or resell shares of earnings. That would be similar to the Masterworks art investment model.
Case 2a: Andrew Heaney (2015)
This case study was written for this blog by frequent contributor, Kosmo back in 2015.
Andrew Heaney, a pitcher for the Angels, recently became the latest athlete to sell a chunk of his future earnings to FanTex. FanTex is paying Heaney $3.34 million in exchange for 10% of Heaney’s future baseball-related income.
Why would Heaney do this? He’s a Major League Baseball player, so surely he’s already unimaginably wealthy, right?
Heaney actually is better off than most players with his amount of Major League service time. When he was drafted (in the first round of the draft), he signed for a $2.6 million signing bonus. The majority of draftees sign for a bonus of $5000 or less.
Minor leaguers make almost nothing – less than minimum wage, according to a pending class-action lawsuit. So it’s unlikely that he’s been able to save any of the money he made in salary while in the minors.
$2.6 million is a lot of money, though, so he should be fine, right? Taxes are going to take a huge chunk of that, and even the thriftiest person would have spent some of the money – a new car, a modest house in the suburbs (LA isn’t cheap), maybe helping mom and dad pay off their mortgage, and of course, food. I’ll speculate that maybe he has $1.2 million left. Heaney is 24 years old, so he may need to stretch that money 50-60 years. With some fortunate investing, he might be able to do it – or he might end up selling athletic supporters at the sporting goods store when he’s in his sixties. 60 years is a long time to stretch a million dollars.
So Heaney decides to hedge in order to avoid his worst-case scenario. Was he smart to do it? Let’s look at some factors.
It’s true that baseball contracts are guaranteed – but until a player reaches free agency a team has “control” of a player, which effectively means they can sign him to one-year deals at below-market rate deals. The deals grow closer to market rate as the player gets closer to free agency. Heaney will be eligible for free agency after the 2021 season, at which point he would be free to sign a multi-year deal with any team. (Note: This is a fairly simplified explanation of how the system works. I’m leaving out details for the sake of clarity.)
There’s one big catch, though. Heaney must be perceived to be a valuable commodity in order to secure a big deal. Heaney is seen as having good potential, but he’s certainly not a lock to become a superstar. It wouldn’t be a shock if he flamed out early either due to injury or poor performance.
A few years ago, Daniel Bard was a hot prospect for the Boston Red Sox. He was their first-round draft pick in 2006 and their minor league pitcher of the year in 2008. He pitched as a reliever in the majors for three years (2009-2011) and did well – among other things, striking out ten batters per nine innings pitched. However, at the end of 2011, something went wrong. As Wikipedia states, “He finished September 0–4 with a 10.64 ERA… Based on win probability added (WPA), the player most responsible for Boston’s collapse was Bard.” In 2012, the Red Sox decided to put him in the starting rotation. He didn’t get any better than September. His strikeout rate dropped while his ERA swelled. He gave up more homers, he walked people, he hit batters. He was sent to the minors and continued to suck. In 2013, the Red Sox waived their rights to Daniel Bard. Daniel Bard earned roughly three million dollars in the major league.
If he had been able to sell 10% of his future earnings (~ $300,000) to FanTex for $3.34 million, it would have been a great deal for him.
Daniel Bard just suddenly lost his ability to get batters out. This is not particularly uncommon. Rick Ankiel was having a great career when he suddenly developed control problems and quit pitching, later resurfacing as a pretty mediocre outfielder (career earnings: ~ $12 million, almost all of which he earned because he was able to transition to being a hitter – something that most pitchers can’t do).
There’s also the risk of injury. A third of major league pitchers have Tommy John surgery, which replaces the ulnar collateral ligament in the elbow. It’s a tremendously successful surgery that has extended the careers of a great many pitchers. Tremendously successful – some studies claim a 90% success rate – still means that sometimes it doesn’t work. 10% of the time, the pitcher never bounces back to pre-surgery form.
The downside of Heaney’s deal with FanTex is that he might earn huge amounts of money and be selling a 10% share too cheaply. If Heaney turns into the next coming of Clayton Kershaw, there may be a $300 million deal in his future. In that case, he would have sold $30+ million in future earnings for just $3.34 million in 2015 dollars. However, given Heaney’s age (which affects career length), status in the sport, and the fact that most pitchers are in decline by their mid-30s, I’d peg an estimate of Heaney’s career earning at somewhere between $50 and $150 million. In my best-case earnings scenario, he’d be selling $15 million in future earnings for $3.34 million.
The $3.34 million from FanTex, after taxes, would probably grow his nest egg to about $3 million. That would allow Heaney to invest pretty conservatively and probably still be able to avoid ever having to work a “real job”. While it’s true that he might end up losing money if he ends up earning $150 million, the fact that he managed to earn $150 million will help soothe the pin.
Essentially, Heaney’s saying that the difference between his current earnings of about $3 million (this includes his signing bonus) and $6.34 million is more important than the difference between $138.34 million ($135 million + $3.34 million from FanTex) and $150 million.
I agree with him.
Case 2b: Andrew Heaney (2017)
Kosmo following up in 2017 on those thoughts on Heaney.
When I last wrote about Heany, he was a decent, but not great, pitcher. I also noted the risk of injury.
What happened? Heaney pitched six innings in 2016 and begin experiencing elbow discomfort. The Angels tried stem cell therapy as an alternative to surgery. However, this did not prove successful, and Heaney underwent Tommy John surgery in June. With a 12-18 month recovery time, he might be ready to return by the end of 2017 – but it’s just as likely he won’t pitch again until 2018.
Heaney will still accrue major league service time for the 2016 and 2017 seasons. However, when he hits arbitration after the 2017 season, he’s not likely to get much of a raise.
In my earlier article, I suggested that Heaney might have career earnings of between $50 and $150 million. The upside is probably a bit generous at this point, but it’s still quite possible that he exceeds the $50 million. Selling 10% of future earnings of $50 million for $3.34 million is pretty much a push, given the time/value of money. If he hits $100 million in earnings, the Fantex deal will end up costing him money.
But there’s still a big caveat. Not every pitcher bounces back from Tommy John surgery. There’s a small, but very real chance Heaney never pitches again. If that happens, the Fantex investors will get almost nothing for their $3.34 million investment.
While both of these hedging decisions appear to have been smart ones, this isn’t always the case. Many young players sign extensions that cap their earnings, and many would have been better off not signing the extensions. However, the stories of Singleton and Heaney highlight the negative situations that those playing are trying to hedge against. While it’s true you want to bet on yourself, it never hurts to hedge.
Case 2c: Andrew Heaney (2021)
Heaney didn’t pitch much in 2017, just a handful of innings. However, in 2018 he had a very good, but not great season starting 30 games – typically a full season. In 2019, he started the season and got injured again. He ended up pitching half a season and being a little better than average. In the COVID-shortened 2020 season, Heaney returned to his very good form of 2018.
From 2017 to 2021, he’s made $15.8 million which isn’t a lot for a starting pitcher. At 30 years old, he’s got time left to make good on FanTex’s investment, but for now, it’s looking like Heaney was smart to take the guaranteed money years ago.
Case 3: Randy Newsom
Back in 2008, Randy Newsom sold shares of his earnings on the public market. Some of the writers at The Slate decided to invest in him.
How did they characterize their investment back then:
If Newsom makes $1,000,000 over the course of his major-league career, the Slate investment group will take a loss, earning a piddling $96 on an initial investment of $143.82. If he makes $10 million, we’ll get $960. And if he makes Barry Zito money? I won’t be retiring early, but I’ll be able to watch my baseball-playing property on some nice plasma TVs.
(Ahhh, plasma televisions and Barry Zito. I miss that part of 2008.)
I looked up Newsom’s career and best I can tell he never made it to the majors. The poor writers at The Slate would seem to have lost the entirety of their $143.82.
As best I can tell, the company that helps facilitate the deal, Real Sports Investments is not around anymore. This experiment went bust it seems.
Final Thoughts: Invest in Sports Players
It doesn’t seem like there’s currently a viable way for individual investors to bid on sports players’ future earnings. If this became more popular and was diversified across a number of players like Big League Advance does, I would be interested in investing. Until that happens, the closest I will be able to come is that nearly worthless pile of baseball cards that I have in my mom’s attic.
For further reading on investing in athletes see this article.
Programming Note: This Saturday, I’m hoping to bring you a special blog post. It will have a lot less personal finance than a typical blog post. If I can find the time to write it the way I want, it could be my longest, most in-depth blog post in 15 years of blogging.