The Lebron-Buffett Connection

In "Common Stocks and Uncommon Profits" Phillip Fisher delves into a notion known as "scuttlebutt" where the investor engages himself in the business and discerns as much as they can about the firm. This could entail going to the firm directly and trying to glean what nuggets of value that could not be otherwise obtained elsewhere. It could include visiting factories, talking to foremen and getting a feel for the operations and determining if it is a productive operation. Going further you could ask managers how they feel about competition, where they stand in regards to competition and if they could not hold shares in their company then which competitor would they hold shares in. Fisher acknowledges it can be a burdensome task, but it can yield very profitable information.

Warren Buffett credits Fisher for many of his values, though Benjamin Graham did have a much greater influence on him. It would seem to me that Buffett has extended this notion in a unique fashion. Berkshire Hathaway owns about $500 million shares worth of Nike. Nike incidentally has held and recently re-signed a contract with Lebron James in March though the terms were not disclosed. For the past couple years Buffett has been befriending Lebron and even commented something to the extent that "if Lebron was a stock, I'd buy him." Technically Lebron's success is intertwined with his. Lebron's relationship to Nike is no different than a steel factory is to Arcelor-Mittal; Lebron is considered an asset to Nike.

Now it could entirely be a genuine relationship. Buffett who has been a big fan of baseball may just have grown excited about basketball being that Lebron was playing so close to Omaha. Or it could be that he is very interested in the true character of Lebron. As the Tiger Woods and Kobe Bryant scandals have evidenced, shortcomings in character can be quite costly to a company grounded in image. Knowing that Lebron is closer to a John Stockton or Michael Jordan in character rather than a Charles Barkley or Jason Kidd would be valuable information to a shareholder of Nike. Buffett has similarly cultivated relationships with Derek Jeter among other Nike partners.

To put it in figures, the contract Lebon had signed in 2003 was $90 million for 7 years, the more recent one will likely be a much larger sum. Nike made about $1.9 billion this past year and footwear contributed the largest to revenue at 54% followed by apparel at 27%. Sales in both categories would likely see a boost from Lebron, exactly how much is hard to tell.

Now this may all seem like conspiracy theory, but I believe Buffett is all business. Whether the investment was made by him or Lou Simpson who manages the Geico portfolio should make no difference. Being that it is a significant holding of Berkshire should make him very interested in the potential for Nike. Nike is a relatively small investment compared to Coke or Wells Fargo, but it certainly hinges on brand and the quality of the underlying athletes that represent the company. Buffett says of risk, "risk is what you don't know." This effort to get to know Lebron seems very much a move to reduce the risk in Nike.