If you're not careful, you could be the next Dan Gilbert.
Gilbert's the owner of the Cleveland Cavaliers NBA franchise, a multimillionaire, and a man feeling scorned by LeBron James' nationally televised decision to leave his team for the Miami Heat, where he'll join superstars Chris Bosh and Dwyane Wade in pursuit of a championship.
"You simply don't deserve this kind of cowardly betrayal," Gilbert wrote in a letter to fans of the Cavaliers franchise. "You have given so much and deserve so much more."
I can appreciate Gilbert's frustration. Sports is an emotional business, and in leaving, James has wounded his former team and the city of Cleveland. That's why we saw fans burning James' Cavs jersey in protest last night.
Businesses don't swap products the way franchises swap free agents, but we've seen businesses implode the same way the Cavs organization is imploding now. As investors, it's our job to avoid owning these sorts of fragile franchises. Here are five warning signs.
1. Bet on companies, not products.
With LeBron, Cleveland often came off as a one-man team. That was a losing strategy. Similarly, history hasn't been kind to single-product companies. Consider Palm (Nasdaq: PALM), which took smartphones mainstream with the Treo, but lost its innovative edge when the iPhone arrived. Palm has since succumbed to a $1.2 billion bailout ... errrr, buyout offer ... from Hewlett-Packard (NYSE: HPQ). As a subsidiary, it'll contribute software to HP's tablet PC effort and fight to remain a bit player in the smartphone market.
2. Beware the cult of personality
When cults make headlines, it's usually for ugly reasons. Cleveland had its Cult of LeBron, a blind faith that the "King" would bring the city an NBA title. Today, we're seeing the fallout of that faith going unrewarded.
Among businesses, cultism tends to be unique to the tech industry. The Cult of Mac that worships at the altar of Steve Jobs is arguably the most famous of all the factions, but there are others. Consider the cult of personality that fell in line behind former Advanced Micro Devices (NYSE: AMD) CEO Hector Ruiz in his crusade against Intel (Nasdaq: INTC). Investors who kept the faith in AMD have paid for it with losses, and the chipmaker remains a second-stringer to this day.
3. Beware the spotlight hog
James is taking criticism for the way he announced his decision to leave Cleveland. Yes, the Boys and Girls Clubs benefitted from the ad dollars generated, but the spectacle itself had the sports world's talking heads talking about LeBron's Big Head.
When executives spend too much time grabbing the mic, and not enough time on executing business strategy, profits tend to take a hit. Witness Overstock.com (Nasdaq: OSTK) CEO Dr. Patrick Byrne, who spent years distracted by a bitter public fight over naked shorting. The underlying business suffered as a result.
Byrne's a smart guy, and he had a point about naked shorting. But in his crusade, he temporarily forgot that shareholders were most interested in seeing him profitably run Overstock.com. Fortunately, he seems to be learning that lesson.
4. Don't forget about depth
As good as he is, James wasn't enough to bring an NBA title to Cleveland. The Los Angeles Lakers won the title because they have a better team. Kobe Bryant's supporting cast was deeper and better than James' -- or, for that matter, the Boston Celtics team the Lakers met in the Finals.
Depth matters in business as it does in sports. Go back to Palm, and then contrast that company with another that some investors mistakenly think of as a one-hit wonder: Google (Nasdaq: GOOG).
The Big G offers a vast collection of services, all based in some part on its search algorithm, and all contributing to the bottom line. Gmail, Google Apps, Android -- each has a role in the company's massive growth. There's no single point of failure.
5. Beware the emotional appeal
Gilbert must have been in a rage when he released his statement about James' decision last night. Otherwise, he wouldn't have allowed himself an adjective-filled screed that promised -- yes, promised -- that a championship banner would fly in Cleveland before James and his new teammates could bring one to Miami.
If only Gilbert could take it back. Emotional appeals work in sports about as often as they do in business. Consider Goldman Sachs (NYSE: GS). Last November, chief executive Lloyd Blankfein defended the company's face-ripping banking practices with an emotional appeal. He was only doing "God's work," Blankfein said at the time. The stock has underperformed the S&P 500 by more than 20 percentage points since.
On balance, I feel awful for Gilbert and Cleveland's sports fans. Few have ever suffered more, and this is just the latest insult. But as an investor, I know these sorts of tragedies happen all the time in the business world, torching the portfolios of good people.
We can be sorry for Cleveland, and at the same time thankful for LeBron. He's reminded us just how fragile a franchise can be.
