Investing in Apollonian Ideals of Basketball

Have any of you ever been completely at the mercy of the timetable of some part of the US government?  Not pining after a tax refund, or spending a year and a half wondering about an entry level job in Gabon after completing the Foreign Service Exam.  No, paralyzed and trapped, body and soul, or knocking around like a pebble in a bucket. This is usually done at the behest of Our Armed Forces, but it might be the Forest Service or perhaps a criminal investigative service or intelligence arm.  A small taste would be the line at an office filled with federal public servants clearly eager to serve you, in their own sweet time. 

This is the sort of waiting that is only glancingly acquainted with clock or calendar.  Things happen when they happen. No one knows why or when, and the only thing to do is invent rumors. The waiting might be punctuated by periods of frenzied activity:  "Fill out this form!"."Go and wait here!". Sometimes the waiting is accompanied by a queasy jangling emptiness, knowing that the waiting might be followed by something much worse, but at least it won't be more waiting.  

Welcome to the NBA lockout.  It's that kind of waiting.

 

Jump to ponder if you're buying low, who's buying high, up with people, and if Apollo will bring you a shiny trophy.

What to do?  The Euros are nearly done with their tournament and Spain will battle France for the control of Flanders the European Basketball Championship, deploying two rosters replete with NBA players. News of JR Smith going to China lacks zest.  Players may goof around with some summer league-type games in September or October in Vegas.  College hoops are a long way off.   What to do?  Theorize!

How about I regale you with some topics that have been milling around, looking for a column?

A Danger of Value Investing

As some of you may know, one hat I wear is as an investment professional.  As such I am familiar with those timeless words of wisdom "Buy low, sell high".  It's good advice, but it comes with two implicit challenges.  Number one: Buying Low.  Number two: Selling High.

Most people think the difficulty is all in "Buying Low" - finding the bargain.  I'll grant you, it's hard.  Not many can do it well.  I'd rate the Houston Rockets gratifyingly adept at "Buying Low".  This roster is simply rife with undervalued players, guys with solid balance sheets, steady cash flows and few management issues.  Some have been Dogs of The Dow but might yet become its darling with the right leadership team.   (A big Dog of The Dow 'Howdy' to: Jonny Flynn, Terrence Williams, Goran Dragic, Hasheem Thabeet, Jordan Hill and Kevin McHale)  The Rockets can Buy Low.

There are a lot fewer books written about how to "Sell High".  Most pundits just assume market efficiency will carry the day, do the work for you, and the value that you saw early on will be evident to all.  Profit is in the bag if one can master buying low.

But what happens if the market isn't efficient, if only because it can't be? There are only 29 buyers, of varying perceptiveness and approach, most of whom have constrained budgets, and limited places to ensconce any new holdings. Any buyer almost always has to sell you something back, and aggregate pricing on both sides has to match closely.  The window for trading isn't open every day and sometimes the assets to be traded can veto a potential buyer.  Given time, you lose control of your asset, and it can choose to auction itself to the highest bidder, with very little benefit to you.  

Does this sound like an efficient market?  I hope not, because it isn't.  Therein lies the challenge of selling high.  Not only must your buyer perceive the higher value of an asset you hold, he has to also contend with the complicating factors listed above, as do you.  (The NBA isn't world club soccer, where players can simply be auctioned off during the transfer windows.  But could it one day work that way, with worldwide basketball clubs?  I'd say yes.)

So our question, can the Rockets "Sell High" is more complex than it might seem.  I'd suggest that so far we simply haven't seen much evidence of ability to capture startling "alpha" from undervalued player investments.  Most of the Rockets trades have resulted in trading generally established value for players with more speculative value (aka upside).  The examples of this to me are: Battier for Thabeet and pick, Brooks for Dragic and pick, Ariza for Lee.  Let's look at one of these trades.

Was Brooks for Dragic and a pick an example of buying low and selling high?  It might be.  The Rockets got excellent value from Aaron Brooks based on where they picked him (near the end of the first round).  He wasn't in their plans at the price he'd want, and he'd been surpassed in al- around play by Kyle Lowry.  Time to sell.  But what did they get?  

The Rockets got a pick of roughly similar value to the one they used to take Brooks, meaning they'll have to strike gold again to equal the value, and a talented PG (with cost certainty for one year) who was having a rough season.  Brooks was not traded for a blue chip player.  He was traded for a pick that probably won't represent a gain from the pick used to take him, and a speculative investment in another player, who looks to be a (valuable) backup (and who now has another PG to compete with in Flynn).  Does this look like the work of Warren Buffet?  It's clearly a win, the Rockets got the services of Brooks under favorable terms, plus a pick, plus a speculation on a player.  They didn't, however, turn a number of intriguing players like Brooks into one bonafide star.

The problem with undervalued assets is that someone must perceive their value to be higher than what you paid, or likely to increase soon. Someone must be willing to pay a higher price than you paid.  So far that hasn't happened all that much (Landry for Martin, Lee for Ariza come to mind).  The Rockets have not exchanged 4 intriguing guys for one superstar.  That isn't to say they haven't tried, and if a player won't "Sign" in a "Sign and Trade" then all the assets in the world won't help.

Still, the question of Buying Low and Selling High in a market like the NBA may be more fraught with difficulty than it would originally appear.

 

Players Don't Like Being Thought of As Fungible

In a real sense we're all of us fungible, except to our loved ones.  As Charles De Gaulle said "The graveyards are full of indispensable men."  Even so, no player particularly wants to be thought of simply as an asset to be traded as part of the Rockets value investing scheme.

Players aren't stock.  Kyle Lowry doesn't have a NASDAQ symbol and isn't divided into a million shares- he's unique and unitary.

Unlike The NATIONAL FOOTBALL LEAGUE (exclamation implied),  there are only 12 men playing for your team on a given night.  Each player occupies the high rent real estate of an NBA roster spot and nearly every significant contract is guaranteed.  NBA teams can't winnow through young players, and discard them at will, swiftly propelling their broken bodies off the payroll (cf Yao Ming, Tracy McGrady).  

I argued above that the trade market for players is a difficult one at best. Each individual player, then, is part of an organization that can be changed only with difficulty once established, and each starting player has a much more direct bearing on team success than any NFL player (other than a QB).

What then is the cost of player discontent?  What happens when the players, generally not fools, perceive that their value is highly conditional, and their employer is willing to discard them instantly for a marginal, and perhaps speculative, upgrade?

We saw some of this in player comments this season, particularly in a defense of Rick Adelman - there seemed to be a real disenchantment with the Rockets' chilly analytic approach.Some Rockets indicated that they knew they were merely  entries in a spreadsheet that is constantly assessing their value, and looking to execute a trade that maximizes that value.  (Morey stated otherwise, whether it convinced anyone is unclear.)

That's certainly good business with securities, and the reality may be that a player IS just an asset of his team, (no one said the approach isn't rational), but he's also a person. He wants to build a life for himself, he wants to maximize his career and his earnings potential, and most guys with the drive to make the NBA also very much want to win and be appreciated as winners.  It's hard for a human being to go above and beyond, to sacrifice his body (and endanger his future earnings) for a spreadsheet that will liquidate any human asset without hesitation.

Unlike stocks, though, the market for NBA players isn't very liquid.  Trades happen only rarely, and there aren't that many active bidders.  So putting a player out "Bid Wanted" for weeks at at time (as this stuff seems to be an open secret) is probably not conducive to thoughts of loyalty.  It's conducive to "business decisions" like taking absolutely as much time as necessary for injury recovery, or not risking one's body any more than is absolutely necessary.  If both sides are maximizing their returns you have to expect a lot of that, and big player pushes only in contract years. 

Yet an NBA title is ultimately won by people, and no year demonstrates that more than The Last NBA Season Ever, as the ancient and crumbly Mavericks destroyed the shiny megalithic Heat.  Dallas had one star, Miami two of the five best players in the game, and another in the top 10-15. Virtually no analysis system predicted a Dallas win.  Yet the human element intervened and toppled a statistically ordained Miami victory.  It doesn't matter what 10,000 simulations indicate, because the individuals on the court determined a different result.  

Would the individuals on the Rockets be able to obtain that sort of result under their circumstances?  Sometimes there's art as well as science to be considered.

Another Challenge Trade That Isn't A Trade

The Rockets signed Trevor Ariza.  The Lakers signed Metta World Peace (which sadly does not appear in the Auto Tag feature yet), aka Ron Artest.  It wasn't a trade, but it was certainly a challenge.  After one year of Ariza the Rockets sent him on his way and brought in Courtney Lee.  We can argue the success or failure of these moves, but they do look a lot like a "challenge trade" without the formal trade.

Now the Rockets have signed old Minnesota coach and Celtic-Title-Facilitator Kevin McHale.  The Timberwolves have signed Rick Adelman.  Using history as a guide The Rick looks like the better bargain.  Time will tell, but just how toxic had things become for the Rockets and Adelman to part ways and for Rick to then take a gig with a frequent laughingstock like the Timberwolves?  Very toxic, indeed, it appears.

I thought Rick might land in LA (where he would be certain to uncover evidence to confirm things he's no doubt long suspected, so then again maybe not).   Minnesota?  Wow.  I think Minnesota has enough talent to greatly surpass recent performance, and the upgrade from the coach-like stylings of Kurt Rambis to Rick Adelman is like trading a Trabant for an Aston-Martin DB9. This could end up looking very ugly indeed.  

Fin

Looking back on the above it appears I'm starting to question Rocket's approach.  To an extent, I am. With the caveat, as I've said ad nauseum, that I don't see any alternative other than tanking. (And how'd you like the top 5 this year?  Yes, you could endure a season of misery only to draft a player best described as "A Solid NBA Starter" and we have plenty of those already.)  If the free agent stars all want to hang out in their  SuperBestFriend Beach & Borough Club, Houston is at a disadvantage until it can offer a legitimate shot at a title, year in and year out. 

I definitely think the Rockets are smart. I believe they are reasonable and diligent.  I appreciate the consideration that goes into every decision.  I like the players the Rockets acquire; they appeal to my aesthetic appreciation of the sport.  

I am starting to wonder, however, if appreciating the Rockets represents a sort of rarefied connoisseurship that doesn't translate into titles.  I want to watch basketball that is as pretty in its execution as in its outcome.  I want players who embody The Still More Beautiful Game at its best.  But do I want results, too?  Can I have those delicious results and the Apollonian beauty and rationality I crave?   It's an open question.

 

Before you get out the torches, or throw a parade, as the case may be, understand that the analytic approach of the Rockets front office demands nothing less from its fans. 

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