Last week Manchester United (NYSE: MANU) signed up French football-star Paul Pogba after paying a record transfer fee of €105 million to Juventus (BIT: JUVE). This raised more than a few eyebrows. Four years ago Pogba was already a United player but was let go to Juventus for a meagre €1 million fee.
To the football community Juventus looks like the clear winner here, pocketing a huge windfall on the sale. Inevitably, United ends up looking like a fool spending such a huge amount of money to resign the player; even more so when he hasn’t yet proved on the pitch that he is worth as much as soccer gods like Cristiano Ronaldo and Lionel Messi.
Even the stock market seems to imply this – Juve’s share price is up about 16% since the rumours of the possible transfer spread in early July. On the other hand, United’s share price is up a modest 6%.
In my opinion, though, Manchester United got a great deal.
Multibillion-dollar global broadcasting deals and the constantly increasing popularity of social media allow clubs to build increasingly larger fan bases. They also allow them to better target specific consumer groups. The signing of Pogba goes a long way in this direction.
He’s not only an incredibly promising footballer but he’s also a fast-rising, young and unique personality that appeals to teenagers across the world. As the accompanying table shows, at the moment Pogba has ‘only’ 7 million Instagram followers, but this figure is growing fast and I have no doubts that his popularity will soon approach that of Neymar, a comparable ‘celebrity-player’, who currently sports 56 million followers.
Pogba provides United with a great, and arguably cheap, way to enlarge its fan base across the world and to continue to strengthen its brand in key markets such as Asia. A strong brand leads to better sponsorships and TV-rights deals which in turn give greater financial resources to grow the brand further and entrench ‘Man U’ as one of the greatest and most profitable football clubs in the world.
And the fact that they sold him for €1 million four years ago is irrelevant when it comes to assessing the current deal.
Fans and commentators are using the old sale price of €1 million as a reference point, or anchor, to evaluate this deal. Of course, relative to that, the new purchase price of €105 million looks high. It’s irrelevant when considered in isolation.
Like us investors, I’m sure they are worried about perceptions. But what does the old transfer price matter? Should United let another team sign a great player just because they are anchored to the past?
The ability to fight this natural human desire to anchor on a static reference point when making a judgement call is an important skill for a successful investor. Football clubs, and especially English ones, are increasingly detaching from their past. Exuberant club owners used to spend big on new signings without worrying about the consequences. Clubs are now run more like corporations and a lot more considerations are given to financial aspects and business development. The Pogba deal shows they are working on their psychological biases, too.
3 thoughts on “Red Devils Don’t Anchor”
Well said. In my own investing life some of the best returns I have made have been on buying a company at ever increasing unit prices as a thematic played out. My initial purchases often being made at a fraction of my last (happily) price paid. Conversely, some of the greatest missed opportunities have been from an anchoring bias where the theme played largely to script but the price got away from me all-the-while ‘value’ was multiplying even faster. Price and value are always fluid & opportunity lies in their proportionality to one another, it’s rarely a raw number. Value investing really is both an art and a science; the only constant being the never ending battle with psychological bias and human emotion. That said, I wince at the price Pogba was bid- did ego have a role in Man U bidding him that high? Arguably yes I think
“Pogba has ‘only’ 7 million Instagram followers, but this figure is growing fast and I have no doubts that his popularity will soon approach that of Neymar…”
It seems that you are simply extrapolating historical growth into the future, when there isn’t necessarily any obvious reason to believe that this will be the case.
“‘Man U’ as one of the greatest and most profitable football clubs in the world.”
I think that you’ll find that Man U is a woeful business that struggles to break even, let alone make profits. Clubs that put sense before silverware are the ones that are the most profitable in the world.
“And the fact that they sold him for €1 million four years ago is irrelevant when it comes to assessing the current deal.”
It does seem to suggest that their ability to predict a player’s future worth isn’t all that great?