A Conservative Game Plan Can Protect Capital

It is sad to hear that Kareem Abdul-Jabbar, Ralph Sampson and other professional basketball players have lost millions of dollars through unwise investments--sad, that is, but unfortunately not surprising.

Because investment disasters seem to happen all the time to star athletes, and to TV producers and movie stars, too--to people, that is, with a need to invest large, often sudden, rushes of income.

Why is that? Why should people who would appear to be set for life if only they invested prudently so often wind up the losers in dippy investment schemes, pouring money down one speculative hole or another?

Fear more than greed, along with ego, are most often to blame. Bad investment advice and haywire tax shelters hurt too, of course, but even conservative doctors and lawyers and business executives lose money that way. The professional entertainer is different, explains Leonard Armato of the Los Angeles law firm of Bushkin, Gaims, Gaines & Jonas--which now represents Abdul-Jabbar. Knowing that the career is short--and may be cut even shorter at any moment by injury--they try to find investments that in one swoop will make them comfortable for life.

Gambling With Capital

The problem is that they go about seeking that comfort in just the wrong way. They gamble with capital they should be thinking of preserving, playing offense instead of defense.

The loss-prone basketball players in the latest case--including Abdul-Jabbar of the Lakers, Sampson of the Houston Rockets, Alex English of the Denver Nuggets, Terry Cummings of the Milwaukee Bucks and Brad Davis of the Dallas Mavericks--invested, for example, in restaurants, a particular pitfall for sports world investors.

“Restaurants are a terrible investment; 85% of them go broke,” says Boston attorney Bob Wolf, who has been negotiating athletes’ contracts and handling their finances for 25 years. “We tell our clients you’ve got a 1-in-7 chance even of surviving. Why do it?”

Those who know athletes think part of the fatal attraction to restaurant investment is poignant--it gives them a feeling that they’ll still be able to entertain the fans when their playing days are over. Another part is unrealistic expectations of what a business, or an investment, should earn--and athletes are not alone in making that mistake.

9% Solution

A highly successful television producer--with a show still high enough in the ratings that, as he puts it, “the kids can go to private school”--was amazed recently to hear the kind of advice a financial expert was giving him over dinner at a Beverly Hills restaurant. “Buy a good commercial building, some municipal bonds, no-load mutual funds. You should try to preserve the capital, and doing that today, with the tax rate coming down, demands about a 9% return,” said the expert.

“Nine percent?” The producer had never heard such a low figure from any of his investment advisers.

In fact, the expert was on the money. With inflation this year running close to 5% and the top tax rate, including state taxes, at around 40%, an investment needs to earn 8.8% in order to retain the purchasing power of the capital. Next year, when the tax rate on the kind of income a star ballplayer makes will be around 33%, the needed return will be about 7.5%.

Investment managers at Bob Wolf Associates advise clients such as Larry Bird of the Boston Celtics and football quarterback Vinnie Testaverde--for whom they recently negotiated an $8.2-million contract--that with long-term Treasury bonds yielding 8%, an investment with somewhat more risk should earn 10% to 11%. For long-term returns they favor the new kind of life insurance policies in which total premiums are paid off quickly and cash value builds up 12.5% tax-deferred, all the while insuring the athlete’s life for as much as $10 million. In the short term they like tax-free unit trusts, convertible bond funds and real estate with high current income--recognizing that athletes may get hurt and need money to live on.

That kind of investing may sound as unglamorous and exacting as foul shooting, but it’s what preserving capital is all about.

In his book “Preserving Capital,” investment adviser and author John Train put it succinctly: “The right attitude is indispensable in preserving capital. It usually pays to wait patiently for the rare bargain in first-class assets rather than keep swinging for the fences with a succession of exciting speculations.”

Not only athletes, it is well to remember, swing for fences. Mark Twain lost much of the fortune earned by Tom Sawyer and Huck Finn by backing one failed invention or poor business after another. But if today’s highly paid athletes, who are reported to be passing around newspaper articles about Abdul-Jabbar’s troubles, think about preserving capital, they’ll do better than Twain. And so should you.