Basketball and Investing: A Match Made in Heaven
During 2012-2014, for about a year and a half, I had the privilege of working for the San Antonio Spurs in their basketball operations department (scouting, analytics, player personnel). In terms of work experiences, it was the greatest year and a half of my life. I learned more during that time period about what hard work really means, how to treat people at all levels of an organization, and what systematic, sustained success really looks like (take a look at the Spurs 20-year win history with five championships, third highest winning percentage among NBA teams, and the same GM-Coach combo in place). More importantly, in a world (especially the sports world) where the idea of ‘building a culture’ is thrown around way too often, I learned what a selfless culture really looks like, and how formulating a successful one, where players and employees think about the organization’s needs above their own, takes years and years to craft.
Furthermore, I had the privilege of working for a guy named R.C. Buford, the Spurs General Manager, a great (and quirky) guy – his assistant once called him an ‘idiot savant’ – who is the most curious, passionate, and obsessive guy I’ve ever seen as it relates to his profession. He is the definition of what Charlie Munger calls an intelligent fanatic. Aside from being the best talent evaluator in the NBA (feel free to Google Spurs second round draft picks followed by their NBA success over the last 20 years), R.C. had a few rare gifts as a leader that made him a great GM, and a pleasure to work for.
He could distill complex things down to their very essence or simplest form through story or explanation
He was an absolute learning machine. The guy was an avid reader, asked more questions than he answered, and his sole focus was improving himself and his organization every single day. He used to say he ‘owed it’ to Coach Popovich and the organization, since it was such a privilege to be in the GM position
Above all else, he treated everyone (from the interns to the security guy to the coaches) with the utmost respect, valuing everyone’s opinion and including all those inside the organization in every meeting, discussion, activity and event. If a homeless person stopped RC on the street and offered tips on how to improve something within the organization, he would listen.
RC probably doesn’t know it, but he would make a great investor. Maybe in his next life. I’ve never met another non-financial professional who understood the concept of compounding (as it relates to daily incremental effort), and operating with a long-term view like RC did. Even if he never used the terms, his decision framework closely mirrored that of some of the most well-known investors which you and I are familiar. He is a true independent thinker who isn’t afraid to buck conventional wisdom in the face of opportunity, or look like a ‘loner’ for exploring a path less traveled. He doesn’t draft, sign or trade for players he doesn’t want around for the long-term (as long as an NBA contract can be), and sinks an incredible amount of resources into the analytical and informational side of talent evaluation. He is a master of the ‘scuttlebutt’ approach to evaluating something or someone, having sent multiple members of his staff across the globe to gather information, and although I didn’t know or understand it at the time, my early learned investment philosophy was crafted under his teachings and guidance.
I can’t seem to find my old pictures of it, but in the back of the Spurs practice facility is a glass case with a big rock and sledgehammer posted up against it. In the case is another plaque above the rock, with the famous quote by photographer Jacob Riis:
(Actual photo of the quote inside the glass case)
This is the Spurs motto, or philosophy. Everyone from the security guys to the interns to the front office staff lives and breathes this motto every single day. It was the first thing they showed me when I flew to Texas to interview for my job, and the first thing they reminded me of when I showed up for my first day of work. The quote has come to embody the team’s long-tenured coach, and serves as a framework for the way the players practice, the way the staff makes decisions, and how the media portrays the organization. The idea of coming to work each day in order to make small incremental improvements that add up over time is forever ingrained in the fabric of the organization and woven into the structure of the culture.
It didn’t click for me until years later, but we can learn a lot in our efforts to apply this philosophy to investing.
I now have a copy of that quote on my wall in my home office, and it serves as a reminder of my own investment philosophy, personal improvement efforts, and how I should be approaching the selection and management of Greystone Capital’s portfolio companies.
I stumbled across investing in my early/mid-20s, like any idiot who doesn’t know anything, via Buffett and his books/letters. I haven’t been given an opportunity yet to gain any formal (or what some would call formal) experience working for a large fund or successful investment manager I didn’t attend any prestigious schools, and wasn’t even aware that investing was meaningful in terms of providing a tailwind in life, or was something I should pursue without the guidance of a professional. As a result of my ignorance, and piqued curiosity about the richest man in the world, I put myself through a rigorous multi-year investing education and learning process that included (and will be forever on-going) reading 100+ books, analyzing companies, studying accounting, reaching out to other investors, reading everything I could get my hands on from trade journals to magazines and diving into every fund manager letter under the sun.
I manage a very small amount of money for family and friends via Greystone Capital – a partnership I established – and I’m also interested in working as an analyst for a fund or value investing firm. I’ve started to reach out to investors, funds and companies to get a feel for how I might be able to get my foot in the door. So far, I’ve had to tell my story in a different way – I can’t rely on educational pedigree, connections or grades – and so I’m forced to try and establish some connections between my desire to become a full-time investor and my past, un-correlated experience. When you’re sitting in someone’s office telling them you’ve got a fire in your belly and pursue every goal you’ve ever had with an animal like tenacity and fervor, it doesn’t always resonate (or worse, they look at you like you’re crazy and ask where you went to college). This is not a complaint, by the way, as opportunities are a combination of timing, luck and preparation, but my message just hasn’t quite ‘stuck’ yet. Onward we go.
What has been interesting though, is during interviews and conversations with investors or prospective employers, one question that often comes up is how and why I made the transition from the world of sports to the world of finance and investing. What does one have to do with the other?
Because I’ve gotten this question more than a few times, I have to assume it’s partly related to what some see as my desire to enter into a lucrative career. Given that managing money has been very rewarding for some over time, I’m assuming people see what appears to be ‘sudden’ interest, and think that I’m looking for, above all else, a payday.
If that’s the case (which has never been confirmed), I understand, but that isn’t the reason. There is also plenty of money to be made in basketball operations. Google the salaries of any one of the 30 team General Managers, a path I was headed down years ago.
I think it’s important to try and think outside the box a little bit, and understand what drew me to this business.
I love to learn, I love to read, and I love to think. I didn’t pick up the practice of investing until early adulthood, because I don’t come from a family culture or educational environment where people own stocks, understand compound interest, or could teach me about the stock market.
That’s not blame by the way. But I had the view that investing was reserved for Harvard MBAs or finance professionals only. I wasn’t one of those kids who was buying his first stock at age 11.
As I learned more, I found the huge correlation between investing success as it relates to picking individual stocks, and the amount of reading, research and learning that one should be doing. That aspect of things immediately appealed to me. Especially the ‘thinking differently and independently’ part. Ask any of my former elementary or middle school teachers about that.
Of course, the business of investing and managing other people’s money is so much more than reading. We all know the Buffett quote about librarians. I quickly figured out that patience, thinking, business analysis, variant perception and most importantly emotions play just as much of a role in the success of active managers.
As I continued to study other successful investors, I realized each had markedly different approaches to investing, yet were still successful. Their lives and the things they were able to work on struck me as diverse and interesting from an intellectual standpoint. You could consider this playing a game with a strict set of rules, but with different strategies.
As someone who can usually find an angle, has a contrarian thought process, and loves a great deal (I hate paying retail for anything), investing as a practice looked really attractive. Value (the idea of buying something on sale) makes nothing but sense to me.
In thinking about the nature of managing a basketball team, a business I was involved in for a few years, and the responsibilities associated with doing it successfully, I was struck by some of the parallels I found to the investing world. These are the types of things I learned about investing without even knowing it.
In talent evaluation, what starts to outweigh pure talent level (roughly 450 players in the league, these guys are the best of the best) are the intangible characteristics of the players. You want to be adding guys to your team who have integrity, character, and understand the team aspect of things. This is similar to how we try to select the management of our portfolio companies. We aren’t the ones out there scoring points (allocating capital), so we had to be sure that guys were going to work hard, sacrifice for their teammates, and put the group above their individual statistics. Of course this doesn’t always work out, and you can still put together a solid team of guys who lack these traits (think Jailblazers in early 2000s or Indiana Pacers in 2004), but when you find a (management) group that is both talented and will sacrifice/has integrity, you get the San Antonio Spurs.
When evaluating talent as a scout (analyst), you’ve got to build your case (or thesis) for why a particular player should be signed, drafted or traded. The evaluation is both quantitative and qualitative, and relies on a number of factors including statistics, experience, intangibles, video, etc. You’ve got to present your evaluation to the group, and they are supposed to tear you apart. It’s very important to focus on why a particular player won’t be a good fit (don’t lose money), as opposed to his level of talent.
It’s important to always, always, always invert. We were extremely focused on the downside before considering how a player could positively help the team.
Similar to the culture of a great business, I became convinced that the most important part of running a successful team was to establish the right organizational behavior and implement a top-down decentralized strategy where employees are empowered, incentives are aligned, and the culture is well known around the league. It takes decades to accomplish this if done right. This is where the magic happens though. If you’ve got a GM and head coach (CEO) that are able to instill a positive culture, and you’ve got some talent, watch out. This idea is why only a few teams stay competitive (really good) year after year. Conversely, GMs who are worried about their job security or short-term record as opposed to long term team performance, can be disastrous.
Similar to our portfolio companies, NBA teams commit extremely large amounts of capital to each player. You’ve got to make sure he won’t underperform that contract (overvalued). The best deals come when drafting rookies (small companies) that turn out to be All-Star level players (large caps). That’s the closest we got to ‘100 baggers.’
The teams (and most importantly, owners) with the most patient long-term view will always win. Always. Mark Cuban. Peter Holt. Clay Bennett. Joe Lacob. Most owners, fans and GMs severely underrate patience. In fact, at times its even vilified. See: former Sixers GM Sam Hinkie.
Bad owners who don’t deploy patience will often times cut short a strategy in favor of a new one (redeem). Fans get impatient, teams have ups and downs in terms of W/L, injuries happen, and as a result, owners fail to stick with the long-term plan (selling at a loss). Similar to bad clients who may jump in and out of an investment fund or partnership, the worst teams have multiple coaches and GMs within a short time frame, trade players frequently, and exhibit a lack of stability. This can be disastrous when trying to achieve long-term success.
Scouting requires teams to scour the globe for talent. The available universe of players has grown considerably over the last decade, and will continue. Some of the best investment managers also scour the globe for mispriced opportunities. Being exchange-agnostic is important, even just for the mental benefit.
NBA teams derive most of their wins from their starting five. Put simply, the best players on the floor for the most minutes usually has a positive effect on W/L (concentrated approach). When running a high concentration portfolio, it’s my belief that the best ideas should make up the highest percentage of our portfolio. If you allowed NBA teams to expand the roster from 15 to 30, my guess is the effect on incremental wins would be nil. You want the best five guys on the floor.
Because all teams are looking for the same thing at all times (talent), exploiting inefficiencies in the draft, trade and free agency market can become a huge competitive advantage. Similar to how value investors attempt to take advantage between the discrepancy between price and value, the best teams search for inefficiencies between talent and pay, an informational advantage, or a young player that teams may have overlooked for various reasons.
There is huge (and unexplored) element of behavioral psychology at play in building an NBA team. The importance of incentives, alignment of interests, avoiding bad decisions and the use of data all play a huge role in the day to day work of basketball operations people. This is an unfair generalization, but it’s my view that very few GMs study behavioral economics, decision making, data, or try to pull knowledge from other disciplines from people who have faced similar problems in the day to day operating of a business (acquiring worldly wisdom). There is a huge ‘follow the crowd’ mentality among GMs around the league. Managers who remain set in their ways is something you see often throughout the world of professional sports, and it’s the quickest way to get left behind.
To witness an example of the approach of running a basketball team like a fund manager, I urge you to take a look at former Sixers GM Sam Hinkie. I believe his strategy best represented this idea, and was a guy I paid a lot of attention to throughout his tenure with the team (he’s also a guy who happens to love investing, Warren and Charlie in particular). He’s clearly very smart, but ended up having more patience and foresight than was acceptable for the league, fans, and his owners. With that said, he was one of the very few GMs who was willing to stand apart from the crowd, think independently, and adopt a very long term oriented approach to team building. He was also right in a lot of ways in terms of the moves he made to improve the team. Those decisions will continue to payoff for years, even though he’s no longer around. I have no doubt he would have succeeded given more time, and some luck.
Hinkie wrote a fantastic letter to the owners of the team upon his resignation, and somehow the letter was leaked to the media, and is now available for public consumption. Here’s the link.
After I left the Spurs organization (I moved on with their blessing to the Houston Rockets in search of what I believed to be a career advancing opportunity, which ultimately didn’t work out, but that’s another story for another day), RC and I started to lose touch, which hurts to think about now. It’s mainly my fault, but I hope he knows I carry with me many of the lessons I learned there every single day, and have tried to apply them to my investment philosophy in terms of company evaluation, risk and portfolio management, and aligning my interests with that of my LPs.
Most importantly, I learned to think differently and independent of the crowd, and came to understand (based on observing hundreds of college, pro and NBA players over the years) that often times there is absolutely no correlation between one’s background – where someone starts out in life, a completely uncontrollable variable – and where they end up. I witnessed firsthand, players who had no business being in the NBA, carving out a spot for themselves based on will, outworking the competition, and being hungry to make small incremental improvements on a daily basis (of course talent is involved, but that is mere table stakes at the NBA level). I’ve also witnessed players in obscure corners of the globe, with no college or high level competitive experience moving on to make names for themselves in a big way (see: Giannis Antetokoumpo). I hope to be given the same opportunity from my ‘obscure corner of the globe’.
Moving forward, if I’m able to experience even half of the systematic, sustainable success that a group like the Spurs have engineered over the years (although results/outcomes are measured in a different way), I will have succeeded as an investor, and improved my ‘win-loss record’ a little bit each year.
It starts with pounding the rock one blow at a time.