How Sixers Trade (and Investing) Offers Lessons on Yin / Yan of Hope and Frustration

Where everyone else sees frustration I often see hope, and when everyone else sees hope I often see frustration. It is a tendency that bugs the shit out of wife.

Take Ikea for example. Full of confusion, arguing couples, annoyed and frustrated families, a maze of lost kids, Eklynd and Harsgaard parts missing somewhere ... yet I believe it to be one of the most optimistic places in the world. Look around and you see new roommates, new families, new renovations all planning for a new and brighter future. Life's improvement is just an allen key away.

I mention this b/c at the NBA draft deadline, my Philadelphia 76ers* made a blockbuster trade to assemble a new starting five that fits together like a well assembled piece of furniture. If you believe the hype we should already crown them Eastern Conference finalists.

I rarely believe the hype and I always get a chuckle reading about "blockbuster trades" and dream teams and other "sure bets" b/c they are rife examples of the yin / yan of hope and frustration.

As the name of this blog suggests, I am a patient investor and I find distasteful the kind of impatience revealed by Sixers' management, their urgency to "win now". Urgency (and many are propelled towards it) is an awful environment to make good long term decisions and good long term decisions brought my team back from the depth of irrelevance even when they were losing at a historical rate.

Now they seek a kind of "get rich quick" scheme; "win the NBA finals quick". It makes me curious of the success rate of "blockbuster trades" like this, so I asked Michael Mauboussin about it when I ran into him at the recent CSIMA conference (I figure if anyone in finance would know, it would be him). Alas, how do you even define "blockbuster trade" and by what timeline would we measure "success"? In the absence of any info, I'd ballpark the baseline at 30%.

Why now? It's as if the team suddenly lowered the discount rate on their assets. Does it have to do with a stadium renovation, (which Comcast is paying for)? Have the rates on their loans changed? Maybe it can tell us something about $APO??! I think they're just impatient.

Youth and picks offer optionality like cash to a portfolio manager. They've lost that optionality so if they don't win now, have given up downside protection and future flexibility. In my mind, they haven't so much widened the opportunity pathway as widened their gutter and as readers here know, I love wide opportunity pathways and narrow gutters.

On reflection, I think Sam Hinkie's genius was recognizing that hoarding draft picks (he called them assets) offered optionality on the future b/c you could project on them any possible future, while turning them into players is so ... much ... harder. Better to wait for the fat pitch rather than chase the tail of instant gratification.

It's possible that my professional devotion to finding niche undervalued and undiscovered securities has bled into a preference for surprise 2nd round draft picks and undrafted free agent over splashy signings. Or maybe as a knowledgeable fan, and as an investor who likes to look at history, I am aware that Jimmy Butler has a spotted history as a teammate, that defense wins playoffs, that it takes time for players to "gel" and that although Sixers coach Brett Brown is a great team maker other teams improved as well, and without giving up as much.

I realize I'm conflating investing theories and sports, which is sometimes appropriate. But most appropriate is keeping our heads on straight and woe be the market participant who invests for the same reasons they watch sports!

I'll admit that with sports, I voluntarily submit to the emotional highs and lows of a season. In contrast, with investing, I aim for equanimity. Yes, it's invigorating to be up and enervating to be down, but investors must focus on facts and knowledge to support them when the whipsaw of short term prices is likely to remove reason from action or separate our heads from our profits.

With patient investing, the season is as long as you want it to be. At least through Long Cast Advisers' first three years, the record indicates some success with these efforts.

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* I don't actually own them, I'm just a lifelong fan

** When I took economics in college with this guy I was put off by my erroneous conflation of "utility" with profit. It wasn't until more recently that I learned that Bernoulli purposefully used the vague term "utility" to simply mean "betterness" as it relates to different people under different scenarios. That guy, by the way, was one of many Manhattan project physicists who transitioned to economics after the war and converted equations of nuclear destruction into equations of math destruction via modern portfolio theory.

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