The LeBron Trade

Wednesday, July 9, 2014 |

Huge upside and a downside that doesn’t cripple you may be an investment worth making.

NBA Free Agency is the ultimate reality show. Rumors, innuendo, last minute game changes, etc. Quite fascinating really. The winner gets LeBron James, the loser, a set of steak knives...

Well not really a set of steak knives for the Cavs. They have a young, talented roster they can continue building with or without LeBron, though would certainly be better with him. The Heat on the other hand would pretty much be destitute.

Regardless, it’s really a binary outcome – you either get him or you don’t. The former obviously puts you in a substantially better situation.

But diverting resources to get LeBron hampers your ability to sign other free agents, who would improve your team. The opportunity cost of chasing LeBron is enormous where you can’t really do anything until he signs. For example, the Cavs lost out on Gordon Hayward as they have dedicated themselves to trying to get LeBron back on the team.

Thus, the argument could be made are you better off going after lower level free agents who you have a better chance of signing and will still improve your team? To illustrate, let’s say the Cavs have a 10% chance of signing LeBron and 75% chance of signing free agent ABC. Free agent ABC makes the Cavs a playoff team, maybe even a high seed in the East. LeBron however makes you an instant title contender and a possible free agent destination, not to mention makes you increasingly more relevant.

Point being the upside is so great with LeBron that the opportunity cost of losing other free agents is totally irrelevant and thus the argument of using your resources to target more likely lower free agents moot. The Cavs need to and have make this LeBron trade.

I do need to attempt to tie this back to investing. And I think I can. If you can find an investment, whether in the market or private or a startup, with huge upside and a downside that doesn’t cripple you it may be an investment worth making. This may be true even if the likelihood of success is low and the opportunity cost is marginally high. Good look finding your LeBron trade...