The most important news for long-term investors is rarely in the headlines. Great contrarian plays rarely come from things most people don’t believe, rather they are based on things most people ignore.
Take the recent news that baseball great Alex Rodriguez — who gained the moniker “A-Rod” during his playing days — and his business partner, Marc Lore, are investing in a new company aiming to be a “stock market’’ for professional athletes. This might be the most consequential investing news of 2022. No, not that Rodriguez is putting money into something called Mojo that will allow fans to take a position on players whose values rise and fall based on their performances on the field, but that a quiet revolution is taking place in sports betting, attracting venture capital funds and interest from insiders without much public exposure.
Before you decide sports betting is too trivial to affect long-term investing strategy, consider three facts. First, it’s big. While statistics are hard to pin down, it is something like the 10th largest global industry measured by profits, employees or market value. Moreover, larger industries like commercial real estate or construction don’t touch nearly as many people as sports betting. Most sports betting is illegal, and much of it is informal, but it dwarfs the business operations — ticket sales, television revenues — of the actual sports people bet on. Professional sports were created by bookies to give people things to bet on, not due to demand from spectators to watch games. This is obvious in sports such as horse racing and boxing, but a little research shows it is true of other professional sports as well.
Second, sports betting has had profound economic effects. It was bookies who financed first the telegraph and then the telephone network, and gambling in general (not just sports betting) along with pornography funded early Internet development. Gambling has also been a major user of cryptocurrencies.
Finally, sports betting plays an important role in shaping people’s risk decision-making. Finance can be boring and intimidating, and we often insulate young people from it with cultural prejudices and regulations, such as attempts to discourage “gamification” of stock trading. When adults make their first major financial decisions—what kind of mortgage to get, how to allocate a 401(k)—they often have far more practical experience observing and participating in sports betting than any kind of financial risk-taking.
Millennials are taking a radically different approach to investing than any previous generation. We see this in the success of RobinHood Markets Inc., in meme stocks, in crypto and in non-fungible tokens. The line between gambling and investing, always blurry, seems to have disappeared for people under the age of 40. This generational shift was catalyzed by communications technology, especially smart phones, and financial innovations bringing transaction costs down to microscopic levels. We might look to changes in millennial sports betting behavior as a clue to how financial markets will evolve as this generation enters its peak savings years.
Alex Rodriguez’s investment is based on the belief that millennials want a more analytic, long-term type of sports betting. Instead of guessing which horse will win a race, or which football team will score more points, the hot new sports betting start-ups are offering bets more like a stock market where bettors take exposure to long-term performance of individual players. There are many variations of this concept, which borrows from both fantasy sports and sports futures. The technology for running these exchanges is a direct child of financial innovations like dynamic hedging and high-frequency trading.
It’s interesting that Generation X, the generation before the millennials, did the opposite. In the 1980s and 1990s, what were called “Nintendo trading interfaces” at the time brought millions of people into on-line day-trading — replacing analytic, long-term stock market investing with something more like a game or a traditional sports bet. Companies such as E*Trade and Ameritrade that capitalized on this trend grew to be major brokerage firms. The movement catalyzed fundamental changes in how financial markets work.
Guessing popular trends is difficult, and perhaps the idea of stock markets for professional athletes will founder on regulatory shoals or is not what millennials want. But if it succeeds, investors should pay attention for three reasons specific reasons, and one overarching reason. First, it could be a very big business. A fun, legal, easy-to-use sports betting industry that matches millennial tastes could have enormous earnings and market valuation. Second, it would change how sports are managed, with more emphasis on player statistics than team success. Third, the lessons learned by investing in player shares would shape how many people make their financial decisions.
But more important than the three reasons above, the development of sports betting for millennials will help bring a confusing picture into focus. The last few years have seen puzzling market behavior around young retail investors. There must be some common denominator among RobinHood, NFTs, crypto and meme investing, but it’s hard to see what it might be. Sports betting innovations might just be the Rosetta Stone that makes it all comprehensible.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Aaron Brown
