The Triad Perspective

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The Low Spark of High-Priced Talent

Fans of the 1960's supergroup Traffic--I'm one--will recognize the twist in the title. Millennials?  Probably not.
But I have to confess upfront...this month's commentary is yet another sports themed one. Baseball at that. Sorry, but irrational behavior can be observed anywhere. Even by the billionaires who own professional sports teams.
Once you reach billionaire status it's quite likely the money ain't the thing any longer. Counting cash just loses some appeal. How to show off your next conquest?  Buy a pro sports team!  Now you can battle your fellow billionaires in non-monetary competition. 
But you can't do it yourself. You need players. Good players. No, you're a billionaire. You deserve great players.  Just like you, Mr. Deep Pockets. You know what they say. Go big. Or go home. 
So, what do you do?  You step up to the plate--yes, a baseball metaphor--and lay out a good-sized chunk of cash for big name talent. And pray to God it works. Spoiler alert, it usually doesn't. 
Why?  Blame all your billionaire friends. They have the same desire to win. And they've got big bucks just like you.  Competition rears its ugly head again. What to do?  Why, outbid them, of course!
My hometown Los Angeles Angels seem to be engaging in this billionaire's arms race. They've acquired a bunch of high priced free agents in the past year, hoping to improve upon last year's so-so season. 

The problem with this approach, in my opinion, is summed up by a Warren Buffett stock market observation:  "You pay a very high price for a cheery consensus."
The track record for most of these quests for instant success is pretty poor. Big name athletes become free agents after a number of successful years. They're often in the middle of their career, at peak performance. Teams then sign these free agents to multiyear contracts.
But signing a 32 or 34-year-old to a 6-year contract is often a triumph of hope over experience. It usually doesn't work out.  By the time the contract ends, the player is limping toward retirement. And the team is just limping. 
The investment game similarly allows people to pay up based upon past performance.  Hot stocks that have done well for years attract a large following among professional and non-professional investors. Prices get pushed up to unsustainable levels based on recent strong results.
Investors can end up paying peak prices for peak performance. In our competitive market economy, it's hard for any company to grow at very high rates for 10 years or longer. And yet stock market valuations can reach levels that require above average growth for decades to justify the current price. 
In our view, price matters. What you pay matters. When you pay exorbitant prices you better be right about the business. And predicting the future is pretty tough. When you pay a below average price, you've probably got a built-in margin of safety in case you're wrong. Or the future develops in more hostile ways. 
In sports, free agents are hardly "free."  In the stock market, sure things aren't "sure."  Pay attention to what you pay. 
-John Heldman, CFA

Past performance does not guarantee future results.  Results are presented net of fees and include the reinvestment of all income.  The opinions expressed herein are those of Triad Investment Management, LLC and are subject to change without notice. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of any securities discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data. Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in any securities mentioned herein. Triad Investment Management, LLC is a SEC-registered investment adviser. More information about us is included in our SEC Form ADV Part 2, which is available upon request.  

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