Like many Americans, I dream of managing an NBA team. I study salary-cap structures, watch YouTube videos of promising rookies, and extensively debate the merits of certain free-agent signings for hours.
In studying winning NBA teams, I've found a lot of similarities between successful portfolio managers and general managers. Here are a few sound ideas they seem to have in common.
1.
Look where others don't.
When announcing their most recent move to fans, most general managers want people to say things like, "Wow, great move! He sure knows what he's doing." But most likely, the reaction to highly successful GMs' moves is, "Huh?"
Look at the NBA champion San Antonio Spurs, for example. The Spurs drafted Argentina's Manu Ginobili and France's Tony Parker with the 57th and 28th picks of the 1999 and 2001 draft, respectively, prompting other GMs to say, "Manu who?" The chances of finding an NBA all-star with the 28th pick is slim; finding one at pick 57 is nearly impossible. However, Parker and Ginobili have since helped the Spurs win three championships.
How were the Spurs able to pull this off? Easy: They drafted foreigners that other GMs had never heard of. In the investing realm, this is similar to Warren Buffett buying a basket of Korean stocks because they were largely unknown and ridiculously undervalued. Nowadays, the NBA has wised up; Yao Ming and Andrea Bargnani have become No. 1 overall picks since Manu and Tony were drafted. A lot of that arbitrage has closed, but mispricings still persist. In the latest draft, the Spurs once again went foreign, drafting a player from Brazil.
2. Seek motivated sellers.
Great NBA GMs look for motivated sellers. Detroit Pistons GM Joe Dumars has built a perennial powerhouse by turning others' trash into treasure. The Pistons acquired Rasheed Wallace, who at the time was a two-time all-star averaging 17 points per game, for a package of three role players, none of whom averaged more than six points per game.
The motivated sellers in this case were the Atlanta Hawks, who were overly anxious to trade Wallace (after a single game!) because of his horrible reputation and bad attitude. Dumars, however, saw that Wallace was a great teammate, extremely competitive, and would thrive in the right situation. Following the trade, the Pistons proceeded to win the championship that year, with Wallace arguably becoming the team's best player.
Great managers also know that motivated sellers can create bargain opportunities. Eddie Lampert was buying tons of Kmart (now Sears
Perhaps Carl Icahn summed it up best when he told The Wall Street Journal, "What's exciting is buying [companies] when no one else wants them." Lately, some prominent value investors have accused Icahn of trying to grab cheap shares of Lear
3. Capital allocation is sacred.
In the NBA, a salary cap limits how much teams can spend paying their players. Thus, the best GMs tend to be extremely disciplined with their checkbooks, since every dollar spent overpaying one player leaves fewer to attract or retain a franchise player like Tim Duncan or Steve Nash.
This often entails making tough decisions. The Pistons and Suns allowed star players Ben Wallace and Joe Johnson to leave, because other teams were willing to offer much more money. However, those tough decisions allowed both teams to maintain salary cap flexibility, and they should ultimately prove to be extremely wise choices. Both the Suns and Pistons teams were strong title contenders this year without their departed free agents, and they'll doubtlessly contend for championships for years to come.
Likewise, great portfolio managers tend to wait patiently for the very best situations to come around before they pay up. The market may bid shares of Google to stratospheric heights, but the great portfolio managers know that a dollar spent on Google at $550 per share and nearly 50 times earnings might not be their best use of capital. Instead, they wait for something a little more attractive, like Buffett's purchase of Washington Post
Pro basketball and the stock market don't make for a perfect comparison. Still, success in both realms comes by mastering a few key characteristics. Next time you're looking for a great investment to elevate your portfolio to championship status, it couldn't hurt to take a page out of the NBA's playbook.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool's disclosure policy liked the Spurs before they were champs.