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The Beta of Basketball: Deciphering the Raptors’ Decline… with Corporate Finance

Posted on: December 3, 2009

I wrote this article for my Commerce program magazine at the University of Toronto, nearly a year ago, midway through the Toronto Raptors’ 2008-2009 season. I don’t think this is my best work, but I tried to put a portfolio management spin on basketball, and I think it sorta fits – fantasy sports is practically stock picking, if you think about it.

In light of one the worst losses in the Raptors’ history happening just last night, I took a look at what I had written a year ago, and have decided to put it up here. Some names have changed, but it looks like the Raptors are making the same mistakes I had foolishly hoped they had learned from.

Managing an NBA team is in many ways very much like managing an investment portfolio – only in place of beta, returns and correlations of your stocks and bonds, you deal with the points, rebounds, and assists of your players. NBA general managers are faced with similar investment decisions that fund managers face, too – whether to invest in blue-chip stocks (the Tim Duncans), risky but potentially lucrative junk bonds (the Ron Artests), or even in promising IPO’s (rookies).
With that in mind, this aspiring finance geek and longtime (closet) Toronto Raptors fan will attempt to show, in corporate finance terms, that the undoing of the Raptors, who have been maddeningly inconsistent since the season began, can be explained due to their management’s breaking of simple portfolio management guidelines…

A Dearth of Defensive Stocks
Think of offense and defense as market upswings and downswings, respectively; in this regard, offensive players are like cyclical stocks which perform well on the offensive end. Defensive players, on the other hand, excel on the other unglamorous end of the floor – in the same way defensive stocks (such as utilities) shine in a recession.
Over the trajectory of their recent ascent to relevance, the Raptors giddily dumped their defensive stocks one by one, shunning defensive die-hards such as Joey Graham, Morris Peterson and Kris Humphries in order to give its troupe of flashy 3-point shooters more playing time. By happily over-investing in such “cyclical” offensive players, the Raptors’ utter inability to defend opposing superstars is now jarringly apparent, and a key ingredient to their mediocrity of late.

An Undiversified Portfolio
The best NBA teams are, essentially, extremely well-balanced portfolios of players, and in the same way diversified portfolios minimize risk regardless of market movements, great NBA teams thrive in various situations and can beat you in every which way. The Celtics and Spurs of today both boast a triumvirate of stars (and able supporting casts) which exemplify this balance, being equally comfortable with both run-and-gun and half court offenses, as well as various defensive schemes.
Unfortunately, with the Raptors every personnel move since their modestly successful 2007 run, the team has steadily moved farther and farther away from diversification – and toward an overdependence on outside shooting. Charlie Villanueva, our multifaceted Derrick Coleman-esque rookie, was traded to make room for jump shooter Andrea Bargnani. Morris Peterson, do-it-all face of the Post-Vince era Raptors, fell out of favor – and the Raptors’ reliance on the sharp-shooting of Bargnani, Kapono and Parker grew.
When their snipers hit their mark, all is well in Raptor-land, and rabid exclamations of salami and cheese abound. But when opposing defenses wizen up and man-up against the Raps’ marksmen – an inevitability given the fact that Chris Bosh, our best inside force, is essentially… a mid-range jump shooter – the offense sputters and the Raptors, well, lose.

Brighter Days Ahead
Raptors fans can however remain optimistic about the team. The Bosh-Bargnani-Calderon core has only gotten better this year, and if new coach Jay Triano’s decision to give ne’er-say-die hustler Joey Graham increased playing time tells me anything at all, it’s that he, for one, gets his corporate finance.

3 Responses to "The Beta of Basketball: Deciphering the Raptors’ Decline… with Corporate Finance"

Hey Joel, cool stuff. Liked it alot.
You know there’s always a blank cheque waiting for you at Hibachi if you ever feel like turning to the dark-side haha.
Hope Senior/4th year at Uni went well and your prospering,
All the best

Wow Joel this is such a good piece, I wonder why theres only 1 comment. Maybe no one has grown the extra testicle necessary in order to be able to comment.

hey nice blog, really creative way to sum up the raps problems (only shoot 3s and don’t play D) it’s the sad truth.

The Hedo investment just never panned out which really hurt them.

We might as well start calling the Miami Heat Goldman & Sachs from now though, because they will have record earnings.

Good blog though,
(also I go to U of T also)

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