Today’s post comes from Paul Ryerson. Paul is a long-time buddy of mine from high school, the cheating commissioner of our fantasy football league, and an adopted Florida man. He also emailed me literally as soon as I put up my recent post about the financial lessons we can learn from baseball player Bobby Bonilla and the New York Mets. My conclusion about the Bonilla deal: Be like Bobby. Don’t be like the Mets.
Well, Paul says I got it wrong. So I told him to write up his rebuttal. And here it is…
(As a note, throughout the post, I’ll leave my comments like this in bold and parentheses)
The Ryerson Response
I don’t often get to one-up Jordan. The Bills play the Jets twice each year, but that’s kind of getting sad at this point. Then there was one time around 2007 that I stiff-armed him pretty hard during a backyard football game at his mom’s house. (I don’t recall this ever happening…)
Unfortunately, that’s about it. That is until Jordan decided to praise Bobby Bonilla for being prudent and the Mets for getting fleeced in their now infamous contract buyout.
When we look at the terms of the deal and add in some of the principles we’ve learned from the Prudent Plastic Surgeon himself, the story isn’t so cut and dry. Let’s go over the facts of the deal first:
- Bobby Bonilla was owed $5.9 million by the Mets
- The Mets wanted Bobby to take a hike immediately
- Bonilla agreed to defer payment for 10 years in exchange for a payment plan
- From 2010 to 2035, Bobby would receive annual installments of about $1.2 million
- This became known as The Bonilla Deal
Sounds like a great deal for Bobby, right? His checks are going to add up to almost $30 million by the end of the deal and he’s set for life. You sure? Time for some math.
Why Bobby Probably Lost the Bonilla Deal
Let’s assume Bobby forced the Mets to buy him out entirely in 1999 and then decided to put that money into an S&P 500 fund and leave it there for the 35 year duration of the deal. Thanks to compounding interest and an average annual rate of return of 10% in the S&P, Bobby would have himself about $165 million in 2035. Yes, $165 million.
What if instead from 2010-2035 he dollar-cost-averaged that $1.2 million per year into the same funds and got the same returns? He still does pretty well for himself, ending 2035 with $118 million.
Taking the cash up front might have made him almost $50 million richer.
(This is not exactly the case. The average return of the S&P since its inception is around 10%. But this includes when it first started and only had like 96 stocks included. Since it expanded to 500 in the 1950s, the average return is more like 6-7%. Still comes out to a good chunk of change for Bobby…)
You can mess around with the rates of return and the break even point seems to be at about 8%. A prudent investment strategy should have gotten Bobby at least to that point. Unless he made some bad bets with the principal, Bobby probably lost money in the deal.
Why the Mets Should Have Won, But Maybe Didn’t
The Mets owners were thrilled that they got to keep their $5.9 million and celebrated by quickly handing a bunch of it over to Bernie Madoff. This was a decidedly un-prudent decision. (I love how much Paul’s worked in the word “prudent” in this post…kid knows branding…)
The Wilpon family apparently spent the next few years trying to convince prosecutors that they didn’t know anything about Madoff’s shady practices.
The Mets also went out and acquired pitcher Mike Hampton with that money. Hampton helped propel the Mets to the 2000 World Series. Baseball has a somewhat complex revenue sharing formula for the playoffs, but even though they lost the Series, it is certain that the Mets pocketed significantly more than the $5.9 million dollars they owed Bobby Bonilla.
(This is a tough argument to get really specific on. Sure, they made it to the World Series and lost to the Yankees. Sure, this increased their teams revenue. But a few years later, Hampton’s bloated contract sunk the Mets into a financial strain that they still haven’t quite overcome. And their recent failures have certainly affected revenue stream to a degree.)
So there you have it
The Mets could have won the deal outright, but got swindled by Bernie Madoff. Bobby Bonilla is going to be just fine, but probably could have made a little bit more by taking the money up front.
Ok, it’s Jordan again here. I’m going to call game…
The problem with Paul’s rebuttal is that he is asking/attempting to answer the wrong question. The question at hand in my post is: “Who won the deal, Bobby Bonilla or the Mets?”
The question is not: “Could Bobby have won more by investing his money in different ways?”
Who knows what Bobby is doing with his money. Hopefully he’s investing it wisely.
But even if he’s not, he still got the better end of the bargain in my opinion. He turned a lump sum into an annuity. Except his annuity is worth way, way more than that lump sum. It’s a deal no insurance company would make with anyone. But the Mets did make the deal.
I’m doubling down…Be like Bobby. Don’t be like the Mets.
What do you think? Who wins the debate, me or Paul? What would you do if you had this choice? Let me know in the comments below!
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