Saturday, June 27, 2009

Investing Lesson - A Case Study

This article was featured on ESPN the other day, and although it is a sports article it teaches a valuable lesson about investing. The article talks about some current/former NHL players that are suing a developer for blowing their investment pool on lavish parties to entice higher profile and higher paid MLB players. Although the set up reeks of a classic Ponzi scheme, that's not why I chose to post this article. I chose to post this article not only because hockey is near and dear to my heart, but also to serve as an illustration of what happens when you violate one of the principle laws of investing basics.

A golf resort developer duped nearly two dozen NHL players out of $25 million, blowing the money on gratuitous parties that were attended by former Yankees players Roger Clemens and Reggie Jackson, according to a lawsuit filed Thursday.

The New York Post reported in Friday's edition that 19 former and current NHL players filed suit against Ken Jowdy, alleging they invested the money with the Las Vegas-based golf-course mogul to develop two luxury resorts in Mexico -- a project they say is seven years behind schedule.

One of Warren Buffett's favorite quotes is "Never invest in a business you cannot understand." I always try to remember that. I think that, in true Buffett fashion, his simplistic mantra is so insightful and all encompassing. In this scenario I would expand it to say don't invest in people you don't understand. If you aren't quite sure of someone's character or your gut is telling you don't invest, then don't. I am sure it is easier said than done and if it was me who made the mistake I'd be on BadskiBlog writing what I learned from the negative experience but simply put don't get blinded by the money or the prospect of making money.

Instead, according to the players, Jowdy squandered the money on "lavish parties" to impress the likes of Clemens, Jackson and banned hits king Pete Rose, among others, who Jowdy hoped would eventually buy real estate in the planned resorts.

The lawsuit seeks the return of the $25 million they invested and $15 million in damages.

Former New York Rangers and Islanders defensman Bryan Berard and one-time Islanders captain Michael Peca were hit the hardest, each losing $700,000 in the deal, according to the filing in Los Angeles County Superior Court.

"It's particularly uncomfortable for all," Berard told the Post. "He's taken our money without telling us, and it's supposedly all gone."

Other players involved in the alleged scam include: Chris Simon, who played for both the Rangers and Islanders; former Rangers Greg deVries, Steve Rucchin and Rem Murray; former New Jersey Devil Turner Stevenson; and Sergei Gonchar of the Stanley Cup champion Pittsburgh Penguins.

Sadly I don't think these guys will ever get a dime back. Everyone has the 'right' to enter into a poor agreement and it looks like that's what these guys did. The funny part is that if the $25M had been put in even a modestly aggressive asset allocation of low cost index and mutual funds they likely would have made, by all conventional definitions, a ton of money. When the majority of these guys were playing and in their money making primes was when the S&P was putting up a 10 year annualized return of roughly 19%. Instead of making money incredibly complicated they should have kept it simple and used the advantage they had, which was large amounts of money to invest with. A sad story but a great learning experience for the rest of us.


Anonymous said...

Bades - great insight...I read through the posting and couldnt help myself to ask the question: "WHY?" Why do these guys have a right to sue someone over a lousy investment? If you tell me to give you 100K and you guarantee me 110K back, and never give it to me, do I have a right to sue you? No way! People would say, "well, you're a complete moron, you deserved to lose that money." I wonder, Is it because our new administration is showing that second chances are given out like a free helping of peanuts from texas roadhouse? If a smooth talker can joust you out of your money, you're clearly an idiot and DESERVE to lose that money, because you would have lost it in more irresponsible ways, i.e. Clemens buying more steroids. "Safe" investments dont mean small returns (even though now they mean negative ones)'s just that everyone thinks of the quick way to make a buck, instead of steady, long-term investment. If it were that easy guys, everyone would be doing it - kind of like Peruvian real estate!


LoRusso said...

It's all in the details. If this guy never intended to break ground & was just bank-rolling the next investment show piece for prospective investors, then they have the right to sue. They will not get any mone but at least this guy will not linger around for years ruining lives like Madoff.