Should I buy myself a football team? Part 2

Last Sunday's Times Money section included a section with Simon Jordan. He's 39 now and reveals that he made around £10m last year, having built a fortune of around £36m from scratch by the age of 32. When asked about his worst ever investment, he said financially it's the purchase and subsequent investment in Crystal Palace football club, originally bought for £11m but then he's spent about £24m on it since for a total of £35m. At current market value, if Aston Villa, one of the most successful English football teams of all time (in terms of League wins) and with a large, established fan catchment area cost under £60m, then I doubt Crystal Palace, with no history, no fans, no top-flight status and little chance of promotion are worth much more than the original £11m spent on them. Yet Simon Jordan says that "emotionally" Crystal Palace was his best ever investment.

This reminded me that this blog has covered the topic of investment in sports teams. The previous post explained the relatively straightforward phenomenon of wealthy individuals (such as Simon Jordan) investing in sports teams in cases where they could receive part of their “return” as a non-financial return, such as increased celebrity or utility from improving the teams they supported as children.

However, in England over the last couple of years there have been a number of cases where football clubs have been bid for or acquired by individuals or investment funds that have an exclusive aim of generating a financial return, with little or no scope for non-financial utility gains. In some cases the investment was even likely to be associated with substantial disutility, in particular with Malcolm Glazer, who bought Manchester United, becoming possibly the most hated man in the country and receiving numerous death threats. This poses the more interesting question of how and why these investors think they can get sufficient returns investing in English football clubs to exceed the returns they could have achieved on competing investments and the disutility from being hated by unwelcoming English football fans?

In the case of Malcolm Glazer’s purchase of Manchester United, this makes perfect sense as an investment. Based on my interpretation of Warren Buffett’s investment criteria, Man Utd is the best Buffet share I’ve seen amongst English companies with market values above £500m. The major factor input is a resilient intangible that has appreciated strongly over time without requirement for significant investment, i.e. the Man Utd brand. This has proved resilient to the relatively mediocre form between the Busby Babes and United’s all-conquering team of the 1990s and I’m always surprised when visiting continents outside of Europe to see the Manchester United team shirt as the most ubiquitous around the World, even ahead of the Brazilian national strip. To this classic Buffett company, Glazer added the private equity techniques discussed previously on this blog to leverage his upside in a conventional leveraged buy-out to make a deal with all the ingredients for success (until spoilt with a ridiculous and unnecessary transfer spend this summer).

Beyond Malcolm Glazer, I don’t understand any of the other return-seeking bids for or purchases of English football teams. Famously very few individuals have made any money out of investing in football, led by David Dein (who is rumoured to have once made a round-trip to Scotland to buy a single Arsenal share from an old widow), Alan Sugar (who supposedly made money at Spurs despite publicly suggesting it was a labour of love) and Ken Bates (who was close to losing his whole investment before Roman Abramovich bought Chelsea and who may now have overall lost money in football following his involvement with twice-bankrupt Leeds United). Even Doug Ellis was reported to only have achieved capital appreciation at Aston Villa just under the rate of RPI inflation during his 38-year involvement.

So why are the new investors coming in? They presumably think they will generate a financial return, but I put this down to herding instincts similar to those that led so many investors into dotcom companies in the late 1990s. My record on predictions on this blog is appalling, running at 0% (0 out of 1), but in an attempt to get up to 50%, I predict that investors getting into English football for financial return will probably leave in a few years' time having made substantial losses.

PS. as datacharmer's back this is either my last or penultimate blog for now, depending on who writes the follow up to Popular Misconceptions about Private Equity, Part 1.

Evolutionary psychology and hunting berries

I want you to know that I love evolutionary psychologists, because the ideas, like “girls prefer pink because they need to be better at hunting berries” are so much fun. Sure there are problems, like, we don’t know a lot about life in the pleistocene period through which humans evolved; their claims sound a bit like “just so” stories, relying on their own internal, circular logic; the existing evidence for genetic influence on behaviour, emotion, and cognition, is coarse; they only pick the behaviours which they think they can explain while leaving the rest; and they get themselves in massive trouble as soon as they go beyond examining broad categories of human behaviors across societies and cultures, becoming crassly ethnocentric. But that doesn’t stop me enjoying their ideas.

This is Ben Goldacre, saying it beautifully. He's not making the berries thing up. Read the whole thing.

Thick as a brick

A reader asks me to list my favourite music albums of all time. There are three that stand above the rest, and I will post on all of them over the next week in chronological order. Here's the first one, Jethro Tull's Thick as a Brick, from the band's '78 Madison Sq Garden performance:



Here's wikipedia, the lyrics (astounding even without the music) and the LP cover newspaper.

Friday Special 18

Space, as you've never seen it before

An idea on how to spend your spare cash, a massive moving home

No more excuses for Russian civil servants

I can feel it coming in the air tonight: Phil Collins, a Gorilla, and ...

Top 50 most expensive cities in the world

Avian flu

A new study by a US university has apparently confirmed for the first time that bird flu has been transmitted from human to human.

Researchers from the University of Washington have studied the case of a woman on the Indonesian island of Sumatra who caught the H5N1 bird flu virus from poultry in May last year. Professor Ira Longini, who led the research, says they have confirmed that not only did she pass the virus on to her 10-year-old nephew, it was then transmitted to other relatives. Seven of eight family members who caught the disease were soon dead.

"This proves there is person-to-person transmission in this case, in that setting, in Indonesia, northern Sumatra," he said. Professor Longini says this shows there is a serious threat of a bird flu pandemic. "It could happen and will happen eventually, and this simply confirms this particular H5N1 virus is capable of person-to-person transmission," he said. "We're going to see strains of influenza that are capable of causing pandemics arising, probably avian strains, and that will happen for sure, there's no doubt about it."

Professor Longini says in this case, a pandemic may have been averted because of the quick action of health authorities or, statistically at least, it could have been luck. He said because the sample group was so small, it was impossible to say how fast the disease could have spread in the workplace or the street. But he says that in the home, it was a fast mover. "It had about a one-third chance of transmitting from person to person due to close contact in that household setting," he said.

Here's the article, via MR.

Animator vs Animation

The animator, looking for a challenge, decides to make the stick figure harder to beat. Little does he know exactly how much power he is giving to the little guy. Long live The Chosen One!




Click on the middle of the image to watch, here is the equally good part 1.

Animator vs animation is the creation of 18 year old Wunderkind Alan Becker, more here.

And here is his comment on 'Praying':

This is my last art project I did in high school before graduating. It's part of a contest involving drawings of the hands. The winner gets published in a greeting card that is sent by the company to all its customers. I almost won. I think it was going to be either mine or my fellow classmate Maggie Sather, and they picked hers, to make her the winner two years in a row.

Anyway I like this drawing and I hope to do more in college.

Ban less, tax more

Indifference Merv recently wrote that non-smokers supporting the smoking ban is the equivalent of turkeys voting for Christmas. His argument is simple: whatever the 'negative externalities' associated with second-hand smoke, smokers compensate non-smokers handsomely for the costs they impose on them. In fact, the average non-smoker in the UK is no less than £135 better off each year as a result of taxes on tobacco.

Merv is absolutely right. In fact, his point applies much more widely.

In economics, saying that x generates a negative externality simply means that whenever someone does/produces/consumes x, he pisses off someone else (x could be harming that latter someone physically, or it could simply be that she objects to x on grounds of taste, morality etc). If you are looking to maximise social welfare and your solution to the externality is to ban x, the assumption has to be that the person(s) suffering from the externality are no less that infinitely pissed off.

Economists are often accused of knowing the price of everything and the value of nothing; in actual fact, economists know that nothing has a value of infinity, and there are very few things that society should keep pretending are absolutely invaluable (for example, the right of a citizen to not get murdered). Banning anything for which adequate compensation can be paid to those adversely affected is inefficient, and we would all be better off if we could ban less and tax more (and then perhaps returning the extra money by reducing income or corporation tax).

Look, for example, at the ban on fox-hunting. Now, a large part of the population believes that 'killing a fox is wrong'. 'Wrong' is a relative statement - and, for most people, fox hunting is near the bottom of the 'wrong' list. What if each dead fox meant 10 children in Africa could be vaccinated against deadly diseases? The fox-hunters would prefer taxation to an outright ban, and so would almost everyone else.

Or think of the (recently reformed) restrictions on pub opening times in England: did anyone in their right mind ever propose that allowing an establishment to operate beyond 11pm would carry a social cost of infinity? What about making large political donations?

No. So, people: let's stop banning 'socially undesirable' stuff, and let's start haggling over the price.

Postscript 1: There are some generic cases where taxation can be no alternative to outright prohibition. One is property crime: how can I possibly compensate you for the £100 I stole from you and be better off myself at the same time? Also, coercion of any type still ought to be illegal (if you could compensate someone for 'forcing' them to do something, how would that be coercion?), as should various behaviours involving minors.

Postscript 2: I have just come back to Athens from here (jealous, anyone?) I'm returning to London and regular blogging in a couple of days, but I thought I would drop by and say hi.