Monday, June 18, 2012

Another star athlete, another bankruptcy

As the article linked at the end of this blog describes, another retired star athlete has filed for bankruptcy. In a previous post, I mentioned the statistics describing the number of football players who are bankrupt, unemployed, or divorced two years after retiring from their professional athletic career. Any time I read a new story, it’s a reminder of how ugly this statistics is. This athlete happens to have been a player on one of my favorite teams—not really important for my point—but it is a team close to home.

There are some commonalities among athletes declaring bankruptcy: significant investments in real estate—from expensive homes to ventures such as theme parks and resort projects, some of which are in court from the beginning—as well as investments in businesses and entrepreneurial projects that go bust. One may argue that this can be an outcome of anyone who engages in entrepreneurial activities—athlete or not. Moreover, as we are well aware, real estate is not an asset that has delivered high returns in the past few years. So, like many other investors, those who were betting on real estate went bust; so join the club.

But, as I tell my STAR EMBA students, a savvy investor needs to diversify risk. And what is wrong with some plain vanilla index mutual funds? One can live comfortably off the investment returns of a basket of boring stocks (and once the earnings total more than 35 million, one can weather declines in the stock market), which have the added benefit of not causing the investor to be dragged in front of a bankruptcy judge. How about entrepreneurial skills? We all aspire to be the next Steve Jobs, but the reality is that businesses have a high failure rate. When we run our own firm—in which we have invested our own money—we face a double risk as our human capital and our monetary capital is tied up in one asset. So, yours better be a good entrepreneurial idea—an iPhone, for example. As the saying goes, “to end with a small fortune, you have to start with a big one.”

It is also true that, if you give a very large sum of money to a young and inexperienced person, athlete or not, chances are the money is not going to be invested in the savviest way. And relying on investment advise from a financial advisor is not necessarily the solution. There is story after story of athletes being taken for a ride by unscrupulous advisors. As I have often argued, and as some new research shows, financial advice is not a substitute for financial literacy. In fact, it is a complement; those who have financial skills are better able to choose the right advisors and to ask the questions that ensure the advisor meets their needs.

I am firmly convinced that athletes have all it takes to be successful in finance. Financial success requires discipline, and who could argue that football players, for example, do not have discipline? Financial success requires perseverance and we know athletes train for long, grueling hours each day. Financial success requires the ability to stay calm in the middle of the storm, and anybody who has watched a quarterback knows what this looks like. Financial success requires knowing the rules of the game, and athletes understand that better than anyone else. What bothers me about this statistics about athletes going bankrupt is that it is preventable. If someone can show up every day for practice, this is all I need to turn him into a successful saver and investor.,0,911896.story?page=3