In my post entitled “The Billionaires’ Peter Principle”,

https://lnkd.in/gZeZcnPH

. . . . I half-jokingly said that billionaires were reaching their level of incompetence by buying sports teams. But, they are the ones laughing all the way to the bank.

Take David Tepper, for example. He bought the Carolina Panthers for $2.3 billion in 2018 and now the team is worth $4.1 billion despite having one of the worst performance records. What’s going on?

Tepper is enjoying an increasing “scarcity premium”. Only 32 people can have an NFL franchise. So long as the stock market keeps creating more billionaires, high demand and limited supply ensures that high team values keep rising.

The increase of $1.8 billion in the value of the Carolina Panthers translates to an annualized return of 12.5%. That’s a good rate of return but not extraordinary for risky ventures. That’s the power of compounding. We sometimes do not easily visualize what compounding can do for wealth accumulation.

This short story conveys four ideas that deserve investors’ attention.

1. The stock market and the sports leagues have one thing in common- one person’s gain is another’s loss.

2. Being above-average is difficult in both arenas because the competition is equally good.

3. If you want to succeed consistently in either arena, you have to do something that is different than others. In other words, you have to answer the question “what’s my edge?”

4. Limited supply/competition creates “defensible franchises” that command high valuation, whether in sports or in the stock market.