The LeBron Trade

Huge upside and a downside that doesn’t cripple you may be an investment worth making

NBA Free Agency is the ultimate reality show.  Rumors, innuendo, last minute game changes, etc.  Quite fascinating really.  The winner gets LeBron James, the loser, a set of steak knives …

Well not really a set of steak knives for the Cavs.  They have a young, talented roster they can continue building with or without LeBron, though would certainly be better with him.  The Heat on the other hand would pretty much be destitute.

Regardless, it’s really a binary outcome – you either get him or you don’t.  The former obviously puts you in a substantially better situation.

But diverting resources to get LeBron hampers your ability to sign other free agents, who would improve your team.  The opportunity cost of chasing LeBron is enormous where you can’t really do anything until he signs.  For example, the Cavs lost out on Gordon Hayward as they have dedicated themselves to trying to get LeBron back on the team.

Thus, the argument could be made are you better off going after lower level free agents who you have a better chance of signing and will still improve your team?    To illustrate, let’s say the Cavs have a 10% chance of signing LeBron and 75% chance of signing free agent ABC.  Free agent ABC makes the Cavs a playoff team, maybe even a high seed in the East.  LeBron however makes you an instant title contender and a possible free agent destination, not to mention makes you increasingly more relevant.

Point being the upside is so great with LeBron that the opportunity cost of losing other free agents is totally irrelevant and thus the argument of using your resources to target more likely lower free agents moot.   The Cavs need to and have make this LeBron trade.

I do need to attempt to tie this back to investing.  And I think I can.  If you can find an investment, whether in the market or private or a startup, with huge upside and a downside that doesn’t cripple you it may be an investment worth making.  This may be true even if the likelihood of success is low and the opportunity cost is marginally high.  Good look finding your LeBron trade…

Please see the important disclosures that apply to this commentary HERE.

Looking for Trades?

My thought on trading, a short(er)-term speculation with some sort of catalyst and strategic entry and exit points, is to always do your own research and then look for outside opinions to validate or strike down your trade thesis (typically strike down to avoid confirmation bias).  While short-term speculative trading is not our bailiwick, several of our clients have personal accounts where they like to do so and we will opine where we can.

What brought this to mind was that the Ira Sohn Conference took place last week. It brings together some great investors to discuss their various ideas in a shot-gun format. What better way to validate or strike down your trade thesis than to compare it to what some of the best traders are doing? 

I don’t know how you get into this party, I am guessing it’s highly exclusive and/or expensive.  Luckily, my research turns up several commentaries: 

• WSJ
• Zero Hedge
• Josh Brown
• Many more here.

The topics covered were broad: macro trends, stocks, economic policies, subsequent central bank bashing, and more.  I need to say I am not suggesting anyone go out and trade any of the ideas from this conference because person XYZ said it was a good idea and past results have been mixed.  As I said earlier, do your own research.  Still the links can provide a good starting point to begin engaging in said research or to vet currently existing research.

In the end I think it’s important when trading -- and I always try to mention this to clients --  to ask yourself, “if I am buying why is someone else selling or vice versa?”.  Research and perspective are the keys making a trading decision.

Past performance is no guarantee of future results. An investment concentrated in sectors and industries may involve greater risk and volatility than a more diversified investment.  The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment