Berkshire Ruminations

Friday, February 01, 2008

Now THIS is cool.

Have you heard about this? Cleveland Indians minor league pitching prospect Randy Newsom is securitizing himself by selling off 4% of any future major league earnings he may realize. For $20 you can buy one share which entitles you (the shareholder) to 0.0016% of his big league earnings. By doing this, Newsom will raise $50,000 in capital. He has even established a company to facilitate future transactions - his own "investment bank" if you will.

The best discussion I have read about this is from Steven Levitt of Freakonomics fame. Professor Levitt conjectures that, assuming Newsom is risk neutral (a big “if” by the way), this price implies Newsom believes his future earnings will equal less than $1.25 million. I just wonder what is going on; if Newsom is simply in need of cash now or if he doesn't think he has a shot at the big leagues anyway. After all, there is enormous information asymmetry between Newsom, effectively the owner-manager, and the shareholder, so I assume we are adapting an extremely high expected return to our valuation. Alternatively, maybe he is most interested in the business and is using his own "stock" to help launch it, also a good way to hedge the possibility of never making the bigs.

I know that if I were a minor leaguer and could accurately assess my own probability of major league success, this scheme would have enormous appeal. Just think about the earnings differential between minor league and big league baseball. I mean, to a 25-year old who has spent his career playing minor league ball $50k is quite a bit of money, but to a millionaire superstar, the 4% of his million dollar salary is comparatively insignificant.


Post a Comment

<< Home