The SportsFolio Journal - February 25, 2021

We have a different look!

For the past nine months, we organized this newsletter by dividing it into three sections: sports, money, and sports & money. The idea was we would warm up with some sports talk, then talk about the economy and offer some remarks at the intersection of the two.

After producing 14 newsletters, that division seems a bit arbitrary now. We found ourselves thinking about whether a sports-focused SPAC belongs to the sports or sports & money section, for example. Or, when we were pondering the relationship between the gambling culture cultivated by Robinhood and daily fantasy sports, it was not obvious whether that should be a money topic or sports & money topic. In any event, we were mostly gravitating to the business side of sports, anyway, so our sports section was not pure sports,  it was all money-related one way or the other. 

It was a good idea, but it didn’t quite work out the way we thought it would. We ultimately just want to write! Starting with this issue, we will use section headers when we think that makes sense. Otherwise, it will be the same content, but it will flow more freely. We’ll take the liberty to jump from topic to topic to truly give you the best story on anything that is sports and/or finance-related. 

We’d like to welcome you again to the next iteration of The SportsFolio Journal. 

More Digital “Assets?”

Top Shot is hot. 

A collaboration between the NBA and Dapper Labs, Top Shot is essentially a digital collectibles site. Think virtual sports cards that sing and dance. Called “Moments,” they are short video clips (of a posterizing dunk for example), layered on blockchain. If you buy one of these, it is yours, with a unique serial number. You can watch it as you please, show it to your friends, put a few of them together as a highlight reel, or sell it at a higher price than you bought it for or add it to your collection like you did with traditional sports cards. 

Is this the next boom? Or yet another pseudo-asset that will turn into a bubble?

The business is flying high. It has been around only for a few months and is still in Beta mode. Sales are exploding though and just a few days ago, we learned that the platform attracted 33,000 users in the previous week and generated $53.9 million in sales. That was as of February 20. 

Run it back? Three days later, we were told that the site generated $132.5 million in sales in the past seven days. Basic math tells us that’s at least $78.6 million in three days. The platform added 27,000 users in one day, almost matching its weekly growth from literally just a few days ago.

One hypothetical question is this: “I can watch the same clip on YouTube, why would I pay for this?”

Good question. If your main goal is to watch highlights and marvel at the ability of the players, you probably don’t need this. If, on the other hand, exclusivity is your thing, then this may be for you. 

Marc Cuban covered this in his blog (which likely contributed to Top Shot’s meteoric rise). He observed:

I get to enjoy knowing I own my Maxi Klieber dunk Moment, along with knowing the serial number and much more. Some people might complain that I can get the same video on the internet anywhere any time and watch it. Well guess what, I can get the same picture on any traditional, physical card on the internet and print it out, and that doesn’t change the value of the card.

He is correct, except … these cards (physical or digital) can not be valued, only priced. Will that technical detail matter? So far, it doesn’t look like it. The dominant market sentiment is that “value is in the eye of the beholder,” and not “a collectible cannot be valued.”

Chamath is also bullish on this stuff (not Top Shot specifically, but non-fungible tokens, or NFTs in general). He said:

I am building a fairly sizeable portfolio of what are called NFTs, non-fungible tokens, some digital art, some virtual trading cards, and these may sound crazy to some, but I do think that that's the next frontier of digital currency and digital assets. So I have been building a portfolio.

Chamath also committed to publicly disclosing his digital portfolio in a few months (or sooner). Will we find a few Top Shots in there? If so, one might consider jumping on the bandwagon. Not as an investor, mind you, but as a speculator, with the money one can afford to lose.  

Round II - Munger vs Robinhood

The old guard vs. new guard storylines are everywhere. Brady vs. Mahomes was a great example and in that case, the old guard won. The exact subtheme is playing in finance, too. Warren Buffett has been the undisputed GOAT and we believe there is a subtle dethroning contest going on. Chamath seems to be in the race. He wants to create a Berkshire-like instrument that is all things Chamath. Chamath is thoughtful, he gave some respect to Buffett and seems to have a genuine interest in the welfare of the everyday American. On the other hand, his bullishness on Bitcoin and SPACs (he filed for seven a couple of weeks ago) are on the opposite side of the scale. 

Chamath is not the only person who hollered at the Oracle of Omaha. Dave Portnoy did it too, in a much less respectful way.  Portnoy is the poster boy of the gamification of investing concept and Buffett represents the old school investing; no wonder there is friction there. 

Now, Dave Portnoy has not been fond of Robinhood lately and didn’t pull any punches during the last Game Stop debacle.  That aside, in a broader sense, they are on the same side: Robinhood is the corporate poster boy of gamification of investing and Portnoy is the biggest cheerleader of the concept. 

Now comes Charlie Munger. Just like a good player giving a hand to his teammate who was fouled hard and laying on the court’s floor in solidarity, Munger shoved back

It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors.

He is not fond of SPACs either.

This kind of crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble. It’s just that the investment banking profession will sell shit as long as shit can be sold.

Well, is he wrong? To us, he is spot on. His comments did not sit well with Robinhood, though. 

In one fell swoop an entire new generation of investors has been criticized and this commentary overlooks the cultural shift that is taking place in our nation today. Robinhood was created to allow people who don’t have access to generational wealth or the resources that come with it to begin investing in the U.S. stock market. To suggest that new investors have a “mindset of racetrack bettors’” is disappointing and elitist.

Looks like the fight is about to turn into a melee. 

What is going on here? We said this before, we’ll say it again and we’ll keep saying this until we, as a society, understand what is going on here and what is at stake. 

All of this is simply disagreeing what investing means and what an asset is; that’s it. When we take all the theatrics away, this whole fight can be reduced to a lack of consensus on definitions. 

The old guard perspective is this: assets generate cash flows. Then, we value those cash flows by doing research. We invest if the price is less than the value. Without assets there are no investments; however, that doesn’t mean every asset is an investment, either. There has to be a margin of safety. 

Not that too much validation is needed on what has been the cornerstone principle of finance for a century, but if you are looking for one, the “Dean of Valuation” agrees

What are some of the practical implications of that view?

1. Investing is generally associated with a long-term view. To be clear, not every short-term trade is disqualified from investing and not every long-term move is automatically an investment. That said, the bigger delta between the price and the value, the better margin of safety and it will likely take a longer time for the price to converge to value.

2. To come up with the right value is hard work. You have to understand the trends, the industry, and the management team’s ability to execute on those trends. You have to know the current cash flows and have a view on future cash flows. You need to understand the risks and the growth prospects. You will not see any of these on a stock chart. You need to put the time in. Even then, it won’t pan out every time, but over the long term, you can give yourself an edge.

3. A traditional sports bet is effectively a binary option. If x happens, you win y. There are cash flows, so it is technically an asset, but there is no margin of safety. You are giving up all margin to give yourself a chance to double the money overnight. Thus, a sports bet is not an investment.  

4. Bitcoin is not an investment, either. It is not even an asset. You are kidding yourself if you think it is. Now, you might say, why does the SEC call it an asset? Christine Lagarde? What about Janet Yellen who is actually ringing the alarm bells?  

Call that creating a successful narrative and give credit to the industry for successfully selling that narrative. To be clear, not everybody is buying it. Roubini, for example, is pounding the table and called Bitcoin a pseudo-asset. That is right. Bitcoin is not an asset, but people perceive it that way largely because of the narrative they were fed. 

If you consider Bitcoin an asset, then maybe you are just relying on a broader definition than ours, but our definition has tight boundaries. Where are yours? If Bitcoin is an asset, why not Beanie Babies? Why not tulips? If everything and anything can be an asset, nothing can be an asset. 

It comes down to this: If you want to speculate with your money and if the powers-to-be determine that such speculation is not socially harmful, go for it; just be aware that you are not investing, you are speculating, there is no margin of safety and you can lose it all. 

Incentives Are Everything

News from Tennessee: Super Bowl betting investigation leads to 74 Tennessee accounts being permanently closed.

We don’t know whether this comes as a surprise to anybody. Economics 101 tells us that people respond to incentives. If the incentive is to make a lot of money in a very short period of time, people will cut corners. 

Against this backdrop, it was frustrating that sports betting was mentioned in the last Disney earnings call. The question started as a sports broadcasting rights question and turned into a sports betting one.

Given the viewership of Super Bowl, this year on CBS was down and it's fairly low for the last 10 years and streaming was up a lot. Can you talk about how you think about that in light of ESPN+? Like how does that factor into your conversations with the NFL?

And then maybe kind of related, but how much of a factor is sports betting in these conversations? And in general how will you leverage both ESPN and ABC to capitalize on the growing legalization and adoption of sports betting?

This is a tough one for Disney. Here’s the first part of Chapek’s answer:

In terms of sports betting. As you probably know we already have some programming on ESPN around the subject of sports betting. It particularly is attractive to the younger, very passionate sports audience that we find. So it's an important piece of what we're doing. We've got relationships with DraftKings and Caesars.

We've got sports links with -- sports betting links with both of those, not branded Disney or ESPN obviously. But branded through their own offerings. We've got a studio in Las Vegas with Caesars that we're working on. And we've also got a variety of different things that we're entertaining for the future.

Let’s take a step back. Disney’s mission, before it became the longer version that it is today, was “to make people happy.” Mickey Mouse and stuff, you know.

Now, making people happy may not be part of the mission statement anymore, but we believe that it is still what makes the company tick. Here is a question: do you think happiness and gambling belong to the same sentence? How does this sound? “I’m happy to be a gambler.” Or this? “I am so happy that my daughter is dating a gambler.”

If people want to go to casinos, that’s a personal choice, assuming the state decides to give them that choice. If people want to gamble on sports, that is a different matter altogether. We believe that is not the individual’s choice. It is the federal government’s. Either way, we don’t think many people will find lasting happiness in the corner of a casino. 

Here is the thing one should consider: If gambling and happiness do not belong to the same sentence, they probably don’t belong to the same company either, especially if that company is Disney. Here’s how Bob Chapek hedged himself when finishing up his answer:

So sports betting we do realize the value in that. We've obviously got some bumpers in terms of our own brand and what we think our own elasticity is in terms of us participating in such endeavors. But we're highly interested in taking the relationships that we have with both parties and taking them to the next level if that makes sense.

Yes on bumpers. Disney has always entertained but did so by creating happy memories for a lifetime. We don’t think sports gambling belongs. It is not in the company’s DNA. As Walt Disney himself said: