A few years ago ESPN ran a documentary on Michael Jordan called “The Last Dance.” Being born in the early 90’s, I have vague memories of Michael Jordan. This documentary fit a lot of pieces together of Jordan’s past that I had never put together myself. It left me even further respecting Jordan’s game and what the Bulls did during their run in the 90’s.
Curiosity got the better of me and I looked up Jordan’s annual salary during this Bulls’ run. According to Spotrac, we see that he only made above $30 million per year in his last two seasons. In all his previous seasons, he was making under $5 million per year.
Now, these amounts are a ton of money, but if this was the greatest NBA player of all time, he was definitely under compensated. LeBron James made over $13 million years before he ever won a championship (just saying).
So how much should MJ have been paid?
Jason Zweig tackled this question in his commentary on The Intelligent Investor:
“Michael Jordan may well have been the greatest basketball player of all time, and he pulled fans into Chicago Stadium like a giant electromagnet. The Chicago Bulls got a bargain by paying Jordan up to $34 million a year to bounce a big leather ball around a wooden floor. But that does not mean the Bulls would have been justified in paying him $340 million, or $3.4 billion or $34 billion per season.”
In other words, there’s a limit to how much the Bulls could pay Jordan. Yes, he deserved to be paid more, but not infinitely more. As great as he was, there was a ceiling.
There’s an investing principle nestled in here.
Zweig continues: “The value of any investment is, and always must be, a function of the price you pay for it. Since the profits that companies can earn are finite, the price that investors should be willing to pay for stocks must also be finite.”
In the late 90’s tech stocks could do no wrong and prices rose to orbital prices.
In the mid 2000’s housing prices “always” went up so there wasn’t an issue with overextending yourself to buy the bigger home, as you could “always” refinance.
In the aftermath of the Tech Bubble and the Great Financial Crisis, we were reminded of this lesson: The higher they go the harder they fall.
There was a finite ceiling to the price of stocks and homes. Just like Michael Jordan didn’t deserve to be paid $34 billion dollars playing for the Bulls, no matter how good he was.
The Rule of Opposites
In investing, the opposite rules are at play. They are simply this: high returns beget low returns. And Low returns (or negative returns) beget high returns.
We tend to view rising prices as a good thing. We like seeing the numbers increase in our brokerage accounts.
But it’s good to be reminded that low or negative returns are a good thing, too. They are the precursor to future higher returns.
So find rays of enjoyment in the good times and in the struggle times.
Unlike Mike, it’s won’t be the last dance.
A cynic once told G.K. Chesterton, the British novelist and essayist, “Blessed is he who expecteth nothing, for he shall not be disappointed.”
Chesterton responded, “Blessed is he who expecteth nothing, for he shall enjoy everything.”