Investing in the Unknown

Monday, January 28, 2008

Feel like investing in something completely chance? Well now you can apparently invest in the future earnings of a minor league baseball player. Purchase a share and you are entitled to a certain percentage of his salary. To be exact Randy Newsom is selling 4% of his potential major league earnings at a 50,000 clip. You can purchase an individual share for $20 dollars which will entitle you to .0016% of his future salary. So cause I'm a dork let's play with the numbers a little bit to find out what these investors are getting themselves into.

Use simple math to deduct the break even point for both the investors and Randy.

X * .04 = 50,000
X = 50,000/.04 = 1,250,000

Thus if Randy makes exactly a million and a quarter over his MLB than this whole investment is mute. No one wins no one lose everyone walks away with the same amount. Well except Randy walks away with the whole Time Value of money benefit but that's an economic's class for another time. Now the current Major League minimum salary is 390,000$, which is certainly a nice chunk of change, but in order to make it up to that break even point he's going to have to have atleast a little staying power.

If we simplify the minimum salary and assume it goes up a tad and make the average minimum salary 400K we can figure out exactly how long he would need to be under a major league contract.

1,250,000 / 400,000 = 3.125 years

Again he's going to need at least some staying to make MLB. Now let's play with some potential numbers to see what life would be like for the investor if he played for a varient amount of years at a varient salary.

1 Year, Minimum Salary: 390,000 * .000016 = 6.24 for a loss of 13.76 cents
2 Years, 400K Average Salary: 800,000 * .000016 = 12.80 for a loss of 7.20
4 Years, 500K Average Salary: 2,000,000 * .000016 = 32 for a gain of 12 dollars
10 Years, 1 Million Average: 10,000,000 * .000016 = 160 for a gain of 140 dollars
Arod's Big Contracts, 252 - 81 + 300: 471,000,000 * .000016 = 7,536 for a gain of 7,516 dollars

Personally I think this is a solid decision by Newsom. The novelty of the idea will probably get him close to if not all of the desire 50,000K. And given the uncertainty of minor league prospects, his current ranking of 50th on the Indians prospect list and his position of Relief Submarine pitcher who throws in the low 80s, the odds of him playing in the majors for 3+ seasons is not very high.

But just in case you feel the need to make a very risky and probably highly unprofitable investment, here's some video of him pitching against nobody.

Posted by Simon at 10:42 AM   Digg! submit to reddit BallHype: hype it up!

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