I love playing sport many sports, but my first love is basketball. Having watched Team USA, a heavily stacked team is there ever one, struggle to an eventual gold made me wonder if the profit incentives of the NBA and WNBA was leading to American basketball to struggle at the Olympics.

Basketball was invented in the USA, has by far the most valuable league, and by far the deepest pool of players in the world. But ever since the first “Dream Team” in 1992, the USA has struggled to win the gold. The original “Dream Team” dominated the Olympics. Led by Michael Jordan they often allowed their opponents to build large leads in the first half just to make it interesting. For most basketball fans this makes sense. The US has the most players and best league and best players. This has not really changed - and yet Team USA can no longer dominate its opposition, even with a team that includes some of the best players all time - Lebron, Curry and Durant. Some people argue that the rest of the world has caught up. If you look at the NBA MVP winners, non-US players have dominated in recent year.

However, even that argument seems flawed. Team USA had four MVPS on their team - Lebron, Curry, Durant and Embiid (he took US citizenship). I would argue that the NBA’s use of the defensive three second rule is one of the key reasons for their struggles. From 2001, it became illegal for a defensive player to stay in the paint, unless they were actively guarding someone. For those of you who don’t play basketball, the simplest defensive tactic is to place your biggest player right near the rim of the basketball to discourage players from driving to the basket. Olympic basketball has no such rule. Why did the NBA adopt this rule? Well the defensive three second rule makes it easier to score flashy dunks - particularly by small guards, which fans love to see. The Jordan years were boom years for the NBA but after he retired for the second time in 1998, the NBA went into a bit of a financial funk. To encourage more flashy play - they tried to make it easier to score - particularly flashy dunks.

In some ways I am arguing that other nations, particularly in Europe, play a more defensive game, and modern NBA players struggle with that. If we look at the NBA Defensive Player Of The Year Award, we find that there are plenty of European winners in recent years. All of the European winners were playing at the Olympics, but Jaren Jackson Jr, and Marcus Smart were not playing for Team USA. Note that Michael Jordan once won Defensive Player of the Year.

It will be interesting to see if the defensive three second rule is really to blame for Team USA underperformance at the Olympics. In 2013, the WNBA introduced the defensive three second rule.

The Women’s Team USA has been far more dominant recently in the Olympics, but in Paris nearly lost the gold medal match the French team.

The reality is that the NBA and the WNBA is NOT about making the Team USA Olympic gold medal winners. They are both profit seeking ventures, and hugely successful ones. From a profit seeking point of view, scoring is more highly valued than defence, and NBA teams and player rightly promote this aspect of the game. I expect to see Team USA (men and women) to continue to struggle at the Olympics.

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My two children love sport. I am also lucky enough that they take after my wife more than me when it comes to sport. I am also lucky enough that my wife is organised and driven enough to get them the coaching for them to both excel in their chosen sports. For me, I think competing and the emotional growth of living and the highs and lows of sport is enough of an incentive to play sport. I think they both learn valuable life lessons. However, I know for many of the other parents they see their child athletes as a future stars and breadwinner for the family. The sports market is very efficient, and once you adjust for the cost and difficulty of making it, is not a sensible decision to try and be a professional athlete. But it seems to me, that the market has not adjusted to the future potential rewards in cricket, making it by far the most attractive sport for a boy to play. Let me explain.

Before we get to cricket, let us go through my thoughts on other major sports. I should say that if your child shows any aptitude towards either tennis or golf, then you should pursue these sports. If your child is not going to be tall, unless they are very gifted, you should steer them towards golf. While short tennis players can do well (see Ash Barty or Andre Agassi), its much harder to excel. Why is golf and tennis so good? Both are non-contact sports, which means professional careers can be long. They are also individual sports, which makes it to develop a personal brand. This increases the likelihood of continuing to earn an endorsement income after ending their playing career. For women in particular, the choice of a sporting career in tennis and golf stands out. In 2022, the highest paid female athletes list is particularly dominated by tennis players, but in 2021 two golfers made the top 10, Jin Young-Ko and Nelly Korda with earnings of USD 7.5m and USD 5.9m respectively. It should be noted that endorsements make up the majority of earnings, and that the non-tennis playing high earners in 2022 both excel individually, rather than in a team sport.

For men, it is noticeable that you can be a high earner in a team sport, as well as an individual sport. Tennis and golf are still great options here, but leading football and basketball players will makes as much if not more. Other sports that pay well included baseball, boxing, cycling, motorsports, American football and ice hockey.

So far, there is little to no evidence that cricket is a potentially high earning sport. However, the Indian Premier League is was only started in 2008, and has become one of the most valuable sports leagues in the world. My analysis suggests it offers great potential for players going forward.

The first thing to say is that sports market tends to be very efficient. Each sports league will need a certain number of new players each year, as older players retire, or injury cuts short a career. NFL needs the most, as the league has nearly 1700 players, but with an average career length of 3 years. NFL recruits mainly from Division 1 College Football - of which there are 254 teams to choose from, or 10,000 players. All the American sports would have similar metrics. For Euro football, most clubs have youth squads that they can choose from, as well as their pick of the best players in Africa, Asia and Latin America. As a truly global sport, it is difficult to quantify how many potential European footballer players there are, but making it to the top tier is difficult. For F1, usually new drivers come through F2, so maybe 30 or so drivers are available for every open position. To simplify, IPL has it pick of the best players internationally, so to be selected for the IPL, you should be selected for your national team. To play for England, you typically need to play for your county first, and then get selected to play for England. That is 18 counties, with 15 players in a squad, gives you 270 players, for a potential selection to an England team. Currently there are 11 English players in the IPL, so if you can get picked for England, you have a good shot at the IPL.

However, as noted above, the real kicker in sport comes from endorsements. Working out the potential for endorsements is trickier. The “intensity” of a match will make this far higher in my view. An MLB team plays 162 games a season, and the league has 2430 games in total. Most people are not going to watch most games. NBA suffers a similar problem, with 82 games in a season, and 1324 games for the league. This leads to the problem of most fans only watching the post-season. But NBA only has 5 players on the floor at one time, meaning the opportunity for brand building is very high (most people in Europe know LeBron James, but how many know Shohei Otani?). NFL and Formula 1 offer relatively few matches/races, and most fans will watch at least some of most events. Formula 1 has the edge here as there are only 20 drivers, which probably explains why drivers often pay to be in F1. For me the most interesting league is IPL. Despite cricket being non-contact sport, the number of matches that are played are relatively limited. Revenue per match is quite high, and it would be possible for most fans to watch most matches. Cricket is far less physically demanding than football, so the potential to increase matches and revenue seem quite high. In it current format, it is only played for 2 months of the year. Potential for endorsements and match pay to rise from here is very high.

The key issue is that India is still relatively poor, so it is far easier for children to get access to the facilities and training to make in cricket in countries outside of India. Using the number of Test cricket grounds as a proxy, Australia, New Zealand, England, South Africa and West Indies have the infrastructure in place to provide players to a growing IPL.

England, Australia, New Zealand, South Africa and the West Indies are the main beneficiaries as the sport is big enough to generate investment in these countries. However with a combined of 130 million compared to 1.4 billion in India, it is clear that India will dominate revenue in cricket. Cricket also benefits from being a difficult sport to master. In another 20 to 30 years, India will likely be producing a huge numbers of world class players as their facilities improve. But right now, for a parent desperate to have their son be a high earning professional athlete, cricket is hard to beat.

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Just a quick karting update. In my last post, Jarrett’s plan was to move up to new class of karts, and race 50% in the UK and 50% in Europe. However, in January of this year, Jarrett was asked to join two European teams, Parolin and Sodikart, to race OKJ. After testing with both teams, Jarrett decided to join Sodikart.

Jarrett will be racing a mix of karting championships, including Champions of the Future, FIA European Championship, FIA World Championship, and WSK (World Series Karting) Championship. We will be racing exclusively in Europe this year. European OKJ is the pinnacle of karting, and the proving ground for F1 drivers. Both Gasly and Ocon raced with Sodikart in OKJ. The top speed in OKJ is around 130km/h.

What has this got to do with my substack? Well one reason I run a substack is it gives me the freedom to help my son with his karting career. If you suddenly see me posting video from what looks like a hotel room, you should understand that I am on the road karting. I will be in the Czech Republic and Denmark in May and June with karting, so anyone who is interested in coming to the track, please drop me a line and we can meet up. I also have plans to offer some kit to subscribers. I found a supplier, who did the design below, but for some reason does not want to take an order. Will sort out soon.

If you want to follow Jarrett or Sodikart on social media - their accounts are below.

Jarrett is always looking for sponsors, so if you are interested drop me a line.

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For new subscribers, you may be wondering why I am talking about karting. In previous posts, I have explained how spending my time with my oldest son in his karting career has helped generate some investment ideas. Lots of subscribers have asked how Jarrett (follow him at @JarrettClark55 on instagram or jarrett.clark55 on tiktok) is getting on, so below is an update on his recent progress. (Above photo is Jarrett with his mechanic Scott Gollings). Below is cut and paste from an update my wife put together.

1. Season end results and highlights

   • British Championships

   • Mini Rok World Super Finals

   • Other highlights - Rotax Festival, Kartmasters GP

2. What's next for the 2023 season

3. Partnership corner

1:  SEASON END RESULTS AND HIGHLIGHTS
The Motorsport UK British Kart Championship

Jarrett has had an extremely successful British Championship by finishing 3rd overall so is now officially seeded 3 in GB for Honda Cadet.  At the beginning of the season, we were hoping for an official top 10 result, given he had to navigate the final stages of the 11+ and 13+ school entrance exams at the start of the season he has performed outstandingly well.  As a top 3 seed he has been invited to the British Karting Awards evening in January to receive his championship trophy. 

Mini Rok World Super Finals 

Due to the clash of calendars Jarrett was unable to do the British Championship for Mini Rok, he was however able to compete in 4 of the 12 rounds, 2 of which he achieved a clean sweep of wins across qualifying, heats and finals.  He was then able to represent GB at the World Finals in Italy as a wild card entry.  He was pitted against the top 84 drivers in the world and surpassed all expectations with some great results by qualifying 8th in group, all heat finishes within the top 7 (3rd in one heat), eventually making the A final starting 11th finishing 21st in the world!

Other highlights

• Jarrett is the 2022 Rotax Honda Cadet Cup Champion

• 3rd in the Kartmasters Grand Prix

See below for Jarrett’s Kartmasters GP post-race interview

2:  WHAT'S NEXT FOR THE 2023 SEASON

The end of the 2022 season marks the end of Jarrett's Cadet career.  For 2023 he will be making the big leap up 2 classes to race in the Junior X30 Category.  This means he will move to an adult size kart, 2 stroke engine which can achieve speeds of 115/120 kph. 

With all this comes a brand-new team.  We are therefore pleased to announce Jarrett has joined Mick Barrett Racing (MBR) whose previous alumni include F1 drivers Lando Norris, George Russell and Lexus Racing USA factory driver Ben Barnicoat.

The next year will be a steep learning curve for Jarrett with more speed, new driving style, more physically demanding and he will be racing against drivers up to the age of 16!

3: PARTNERSHIP CORNER

Thank you to the 2022 season sponsors Build Generation and Broad Lane Leisure.

Thank you to TLV performance and Accelerate Media.

Thank you to Synergy Honda Factory team.

Thank you to Jarrett's mechanic Scott Gollings.

Thank you to his supporters!
 

Lastly, we are currently in search of further sponsorship for Jarrett for 2023, should you wish to support further or know of any organisations/companies or individuals who are interested in youth motorsport development please do not hesitate to get in contact or pass on our details.

Thank you!

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There were a number of reasons I stopped running a fund and starting writing a newsletter. The first reason was that the relationship between equities, currencies and bonds were not acting in the way that they used to, or in a way that made sense to me. But also equally importantly was that I enjoyed spending time with my family. These days I spend two weekends a month on the road with my oldest son. Here is a map of places I have DRIVEN to this year.

London to Glasgow is a good 7 hours drive with stops, while Sunderland is 5 hours. Fortunately Jarrett is doing well this year and is second in the Honda Cadet British Championship.

If you want to be kept up-to-date on karting, then follow Jarrett on instragram @jarrettclark55 or Tik Tok @jarrett.clark55

So karting does take up a lot of my time. And has led me to a possible stock idea. The interesting thing about this stock idea is that it leads right back to the reason I stepped back from managing money. Lets take a look, and I can explain as we go along.

Most kart tracks are located in out of the way places - mainly due to noise pollution. The hotel chain we stay at the most is Premier Inn. Premier Inn is the main operating asset of UK listed Whitbread (WTB LN). Whitbread used to also own the Costa Coffee brand before selling it to Coke Cola. Whitbread has been around a long time.

One Sunday morning as I was eating my all you can eat English Breakfast (cost £10) before we headed off to the track, I noticed another karting dad getting his breakfast for free after waving his “Shareholder Benefits” card. If you own 64 shares of Whitbread (at todays price of £26.76 would mean an investment of £1712), you are entitled to a free breakfast with every stay, and 10% of food and drink at their restaurants which are attached to the Premier Inn. So on average month of 5 nights at the Premier Inn I could save £1000 a year, making this a no-brainer investment, with a 1.7 year return on investment!! Of course, this risk is that the benefits could be cut and that Premier Inn could fall by half or more - which seems to happen regularly with UK mid cap stocks (see Ted Baker, Genus, Aston Martin etc etc) so I took a closer look at Premier Inn.

Premier Inn is a low cost hotel chain that aims to be located near transports hubs, such as motorways, railway stations and the centre of small towns. They also own a number of pub brands, including Beefeater, Brewer’s Fayre, Thyme Bar & Grill among others. The pub are used as a restaurant for the hotel, particularly for breakfast, but are run as stand alone businesses. In the Premier Inns I have frequented they do very well in attracting locals. I can attest to the £17 chicken and rib combo as being decent.

Premier Inn has 840 sites and 82,000 rooms, making it the largest hotel brand in the UK. It competes with brands such as Travelodge and Holiday Inn. As a rule I prefer Premier Inn over both Travelodge and Holiday Inn as its has better rooms and tends to be cheaper. Premier Inn books directly rather than through online travel agents, which is a big positive. As far as growth is concerned, Premier Inn is targeting 110,000 rooms in the UK. It has recently entered Germany, and has a target of 14,000 rooms, and see potentially expanding to 60,000 rooms. So there is growth potential. If we assume EBITDA margins return to 40%, and revenue per room returns to pre-Covid levels, and they hit their growth numbers (110,000 rooms in the UK and 14,000 in Germany) then they should generate GBP1.4bn of EBITDA. 10 time EV/EBITBA has been roughly the level it has traded at before, and in line with Accor, gives an EV valuation of GBP 14bn. Less 5bn in debt, give an equity valuation of GBP10bn, compared to a market cap of GBP 5bn.

One thing I like about Premier Inn is that its low end, and not concentrated in London, which means if my theory of falling income equality is realised it could do quite well. It would also imply upside to revenue forecasts.

One big problem for Premier Inn, is that most of it hotel and pubs need to be driven to. And as someone who drives a lot, the current price of petrol in the UK is a problem.

While the spike in oil is linked to the Russian invasion of Ukraine, it has been exacerbated by the Bank of England being very unresponsive to rising inflation. Which has cause sterling to be weak, leading to more inflation.

So the big risk is that the Bank of England raise rates dramatically, or sterling continues to weaken, and inflation continues to erode incomes in the UK. These inflation worries have seen Whitbread bond yields move from 2.5% to 5% today, and the stock suffer accordingly.

Whitbread sums up the dilemma with all investing today. If inflation is here to stay, then financial assets are still too expensive. And if cost of living crisis continues, corporates are likely to see margins squeezed, and rising yields putting pressure on valuations. On the flip side, Whitbread is a well run company, and has a history of selling assets, so could easily be bought out. The stock is cheap if its can hit its growth targets.

What am I going to do? I think Whitbread looks better than 90% of stocks out there. But even so, my base view of still rising inflation and rising commodities makes me very cautious. As I have at least 2 more years of karting ahead of me - so I think I will buy my 64 shares and get a free breakfast! I guess that’s one way to hedge against food inflation. For everyone else, you need to take a view on inflation and bond yields, and my view is that they have more to go, but if I am wrong on that, then Whitbread looks a decent play to me.

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As mentioned previously, stepping away from managing money has allowed me more time with other parts of my life. But these different areas have also opened my mind to various other ideas, so I would like to share some details. One area that takes up an awful lot of my time is my son’s karting career (Instagram : jarrettclark55 - please follow. It brings him untold joy to have more followers!). There are many, many stories that I could tell you about karting, but I am just going to focus just on the economics, as I think it illustrates many of the potential flaws with many “quality” stocks.

Jarrett is competing in the British Championships Honda Cadet Class this year. Many of the current Formula 1 drivers have competed in British Karting Championships. It is highly competitive, with races held all over the UK. You can see below, the chassis, tyres and engine are all specified.

To try and make karting fair, all of the equipment is regulated. Race tyres have to bought from the organiser on the day and a set costs £150 or so, and chassis can be bought from a number of different providers with a new one costing around £2,500. Engines however are far more variable. If, like me, you knew nothing about karting before starting, you might have googled 160cc 4-stroke engine to get an idea of how much that costs, and then estimated the cost of an engine at around £250 to £400.

However, the reality is that there is a lot of variation in the power of the Honda engines when the leave the factory, some have good “bottom” (i.e. good acceleration) while some have good “top” (i.e. a very fast top speed). What in practice happens, is that engines with a proven history of winning trade a large multiple of their ex-factory price. Think of a number and triple it, and you will be closer. You also need three to four engines - one wet engine, one dry engine, and one practice engine. You may ask if people will really pay that much money for an engine? The way I explain it to people, is imagine the most insane football mum or dad you have ever seen, the one who is shouting non-stop at the ref, and their own kids and is totally emotionally committed to their child making it in football. Now imagine if you came up to them and said, “Hey I have magic football boots which means your child will be competitive with the best kids in the country. Would you like them?”. If you can imagine that conversation, then you can understand why competitive karting engines are so expensive. Almost all karting parents are totally emotionally committed to their child making it, so demand is very strong.

However, the value of the engines are subject to changes in regulations. A few years ago the British Karting Championship was run under a pooled engine system, which meant every driver had to rent an engine at random on the day of the event. The pooled engines were all adjusted to be roughly the same level, but there will still be some variation. And there is a alternative karting championship which is run under those rules, but the British Karting Championship is the official competition and has the largest participation and gets the best racers. In some European countries in some racing classes, karting regulations are such that the winner of a kart race must sell their engine to anyone that wants it at fixed price. This acts to keep a ceiling on engine prices.

There are some advantages to not regulating engines. The Honda Cadet is an entry level for karting, so many novice karters begin racing at this level, and by making fast engines expensive allows the older more experienced karters to battle it out far away from the novices. It also acts as a barrier to entry, to reduce competition. Hence like most regulation, it benefits insiders at the detriment to outsiders.

UK Motorsport are contemplating changes to karting for next year, which has caused us to be underwater on our own engines on a mark to market basis. We may end up being forced sellers at a loss, but having talked to some more experienced people than myself, there is a chance that no changes will occur and the engines will bounce back in value, as this is exactly what happened a few years ago. I was told off one specific engine fell to 80% in value, before fully recovering.

There are other expenses and considerations, and if there is demand for a post purely on the costs of being a karting parent, I will try and oblige. But the point of this story is to show how regulatory schemes create “undeserved” value. Does this happen in markets? Of course it does. The best possible example of this, are the rating agencies, specifically Moody’s and S&P. I will go into detail of how bad these companies are at their core business, but first of all you should be aware that from a financial perspective, both business are high “quality” and have been 10 baggers since 2010.

However, the reality of their key service, providing ratings for fixed income securities is that they largely produce a pointless and typically bad product. The rating agencies were the root cause of the global financial crisis, by giving investment grade ratings to CDO and other structured finance products, when in fact they were worthless. However, in the move away from investment banks to clearinghouses, the rating of a bond by the rating agencies became even more important to markets, not less important.

If the subprime was a one off, perhaps this would be excusable, but rating agencies typically downgrade bonds at the worst time, and upgrade too late. A classic example of this was the Eurocrisis. In 2010, the first arrow indicated when Irish bonds were downgraded to junk. The second arrow indicates when the rating agencies upgraded Ireland to investment grade. That the rating agencies follow market action, rather than have any predictive power is well known by market participants. Or to put it another way, the market does a far better job than the rating agencies - but regulators requires bond issuers to have a rating from a rating agency, despite the market doing a far better job of pricing risk. The rating agencies have a dream business. Government regulations create forced buyers of a substandard product. I would argue that clearinghouses are in very similar position, doing a substandard job, but with regulations creating forced buyers of their substandard services.

I have used the karting analogy for two reasons. Firstly, I want to make the point that politics, as expressed through regulation is a very powerful force in market. The ability to influence regulation is a very powerful value creator for many businesses, particularly in America. Healthcare, aerospace, utilities, finance and recently semiconductors are all deeply influenced by regulation and politics, and area that I have previously ignored.

The second reason is that future posts I going to refer to some investment ideas that I have gleaned from travelling around the country as I help my son with his karting career. I thought if I suddenly start talking about market observation I picked up at a Premier Inn in Sunderland, the most immediate question would be why was there, rather than the merit of an investment idea. And my next post will indeed be about an investing observation I made while on a karting trip to Sunderland.

P.S. Do remember to follow @jarrettclark55 on instagram!

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