March 2024
IN THIS ISSUE
This is not news anymore
Insuring Aaron Rodgers
Now that the Swifty Bowl Super Bowl is over, let’s reflect on what this NFL season can teach us about investing.
New York Jets fans can’t help but wonder what could have been. Aaron Rodgers, their newly acquired 10-time Pro Bowler, 4-time MVP, and Super Bowl winning quarterback took a pay cut with his two year, $75 million all-guaranteed contract to try delivering an elusive Super Bowl to the New York Jets franchise.
In unfortunately prescient remarks when the contract was announced, Rodgers said “Now, again, anything could happen with my body or the success that we have this year [emphasis mine], but I’m having a blast, so I don’t really see this as a one-year-and-done thing.”
Well, anything did happen with his body - just 94 seconds into the first game in fact, when he suffered a season-ending rupture to his Achilles tendon.
To literally add insult to injury, the Jets chose not to insure Rodgers’ contract, for which a premium of $4 million would have paid out an estimated $22 million.
So - Thinking in Likelyhoods - did the Jets make a bad decision by not insuring Rodgers’ contract?
Many have said, with 20/20 hindsight of course, that obviously the Jets should have insured his contract. He was a 39 year old playing an injury-prone position, and the Jets should have bought the insurance at any cost.
But this smells of judging a decision by the outcome instead of the process, doesn’t it?
First: There’s a reason folks should not insure their vacuum. If one cannot tolerate the expense of buying a new vacuum when it breaks, one should probably be prioritizing other financial needs ahead of vacuums.
Second: Insurance necessarily costs policyholders more in the long run - that’s how insurance companies run a profitable business. Buying an insurance policy for the profit potential is a losing game. You buy insurance hoping to never use it - that it expires worthless. Jets owner Woody Johnson allegedly has not taken out insurance on Jets players in at least a decade.
Third: Insurance exists to mitigate volatility in life-changing impacts. This is why we insure our homes but not our vacuums. So long as one can tolerate the volatility of infrequent larger losses - which, with Woody Johnson’s 2023 net worth of $6.43 billion and Jets franchise value of $5.4 billion seems to be a sound assumption - the need for insuring any one player is nil. Considering a Jets valuation of $5.4 billion (with a B), insuring Aaron Rodgers’ $37.5 million (with an M) annual salary is akin to ordinary folks insuring a vacuum.
So, what can investors learn from not insuring Aaron Rodgers’ contract?
Investors who hedge against non-catastrophic market downturns are seeking to profit from vacuum insurance. If investors cannot withstand ordinary market volatility, they either are investing beyond their risk tolerance or are overpaying to dampen the volatility. The ability to withstand ordinary market volatility, and not jump off the market’s roller coasters, creates long term profit opportunities. When market selloffs lead risk-intolerant investors to cut their losses, those can create the sweet-spot pitches in the no-called-strikes game that Warren Buffett has been so adept at waiting for then hitting out of the park.
Much respect for your risk management decisions, Woody. And rest up Aaron, see you in August.
RIP Daniel Kahneman
Daniel Kahneman, the Nobel laureate and pioneer in Behavioral Economics, passed away on March 27th. His work has been foundational in my development as a scholar and investor. In his memory, here are a few of his most influential quotes that relate to my investment management:
"We’re blind to our blindness. We have very little idea of how little we know. We’re not designed to know how little we know."
"The brains of humans and other animals contain a mechanism that is designed to give priority to bad news."
"A person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise."
"People who face very bad options take desperate gambles, accepting a high probability of making things worse in exchange for a small hope of avoiding a large loss. Risk-taking of this kind often turns manageable failures into disasters."
"A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed. Once you adopt a new view of the world (or of any part of it), you immediately lose much of your ability to recall what you used to believe before your mind changed."
"Loss aversion - When directly compared or weighted against each other, losses look larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce."
ONE MORE THING…
This is not news anymore. Yellen says she regrets saying inflation was ‘transitory’ (The Hill)
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