Baseball’s Surprise Lessons for Investors

Shohei Ohtani of the Los Angeles Dodgers deferred $680 million of his $700 million 10-year contract. (Jayne Kamin-Oncea/Getty Images)

As if my fellow Mets fans could feel much more miserable given the team’s recent skid, next Tuesday is the day that shall live in infamy for the New York National League franchise, aka Bobby Bonilla Day. Every July 1 since 2011, the former Mets outfielder gets a check for $1,193,248.20, and will continue to do so through 2035, even though he hasn’t played for the team since 1999.

In 2000, the Mets bought out Bonilla’s contract, on which he was still owed $5.9 million. Instead of that upfront payment, they agreed to a deferred annuity that would provide him a nice retirement income of nearly $1.2 million a year. The deal assumed an interest rate of 8%, which provided Bonilla with almost $30 million over 24 years, or more than five times what he would have pocketed up front.

Therein lies the lesson of every basic finance course: the time value of money. A dollar today grows to many dollars over time through compound interest. Running the process in reverse, the sum of a future stream of payments can be discounted to a present value. How much the future value of an investment increases, or what the present value of future payments is worth, all depends on the interest rate.

The seemingly outrageous checks that Bonilla pockets each July 1 only seems so if the assumed rate of return of the payments is ignored. In a 2023 paper, Gerald Kruse, a computer science professor at Juniata College (and Chicago Cubs fan), calculated that investing the $5.9 million the Mets owed Bonilla at 8% (what BBB corporate bonds paid in 2000) would have readily provided his $1.19 million annuity.

But the Mets thought they could do better. The team’s ownership, then led by Fred Wilpon, reckoned his good friend with whom he invested for years, Bernie Madoff, could generate a higher return than what the Mets paid Bonilla. Kruse calculated if the Mets earned 10% (the low end of what Madoff promised Wilpon), they would end with an extra $48 million when they were done paying Bonilla in 2035.

Alternatively, the Mets could set aside just $4.2 million—saving $1.7 million upfront in 2000 that could be used for other player talent—and satisfy Bonilla’s future checks, if they would earn 10% instead of 8%.

Of course, we know what happened. While Barron’s raised questions about Madoff’s purported returns as far back as 2001, he famously went bust in 2008 after the crash made it impossible for him to continue his Ponzi scheme. The Mets and Wilpon suffered, along with scores of other investors, but were still on the hook for Bonilla’s payments.

More recently, Shohei Ohtani, the Dodgers superstar, opted to defer $680 million of his $700 million 10-year contract, although interest rates play a lesser role. The present value of the deal actually is $460 million, a significant discount from the $700 million stated value, based on Major League Baseball’s Competitive Balance Tax, aka “luxury tax,” rate of 4.43% (which is around where the 10-year Treasury trades).

Ohtani takes only $2 million in salary currently from the Dodgers, freeing up money to help the team repeat as World Series champs. Somehow he’ll scrape by; he reportedly makes $100 million in endorsements. The New York Times also calculates he’ll save between $90 million and $100 million in California state income taxes by deferring his Dodgers paycheck, thus showing how interest rates and taxes both figure importantly in ultimate returns.

As noted, the time value of money works both ways, which is being demonstrated with another baseball player. This time, Fernando Tatis Jr. of the San Diego Padres is contesting a deal he made when he was a 17-year-old prospect back in 2017, when he accepted a $2 million payment from a firm named Big League Advance in exchange for 10% of his future earnings.

Now 26, he signed a $340 million 14-year contract with the Padres in 2021, which means he owes Big League Advance $34 million. Tatis also would be on the hook for 10% of other future earnings under the agreement. This past week, Tatis filed a lawsuit against BLA to void the deal.

Based just on Tatis’ Padres contract, Excel calculates BLA’s return for its $2 million outlay in 2017 is 42% per annum through 2035, assuming Tatis’ contract pays the $340 million in equal installments over 14 years. Not bad.

Of course, Tatis could have flopped or have been injured before his Padres payday. BLA’s gamble paid off, by paying out a seeming king’s ransom to a teenager for piece of this future star’s potential earnings. But by making a large number of such deals, BLA’s risk that any one doesn’t pan out is reduced. That demonstrates the other basic finance principle, diversification.

The lessons extend beyond sports. Like the Mets decades ago, some public pension funds have assumed high returns to pay future benefits. The future obligations of New Jersey and Illinois are less than 50% funded as a result.

And like teenage Tatis, seniors are offered upfront payments to sign away life insurance payouts, which may come relatively soon, or to enter into reverse mortgages to provide current cash, effectively monetizing their home equity.

The lesson is that money and time have a price. Bonilla presumably enjoys a comfortable retirement as he cashes the Mets’ check this Tuesday, assuming he can scrape by on $1.2 million for the next year and through 2035 (along with other similar deferred deals), which he gets by having delayed immediate gratification for years. I reckon Tatis will manage to get by despite having to fork over 10% of his $340 million the Padres pay and other income.

Write to Randall W. Forsyth at randall.forsyth@barrons.com