As I’ve mentioned before, I’m the biggest Cleveland sports fan you will ever meet. Despite their yearly finishes near the bottom of the standings and constant heartbreaking losses the few years they are competitive, I still follow the Browns, Cavs and Indians to the very end.
This season has been a surprisingly good one for Cleveland’s baseball team, the Indians. After finishing in last or next to last place most of the last five seasons, the Tribe find themselves in the playoffs for the first time since 2007 as the first wild card team.
No Paying Customers
Unfortunately, despite their success and the excitement around the team, they can’t get anyone to go to the games. In the month of September, they have drawn less than 10,000 fans and set new records for attendance lows several different times. This is very unusual for a Cleveland sports team, as fans are normally thrilled to support a winning team the few times they have one. And this particular Indians team had already built a little bit of goodwill with the fans by spending money on some very good free agents in the offseason.
So why are the Indians having so much trouble getting fans desperate for a winning sports team to come to their games? There are many reasons for this, but the story of how they got here is a valuable business lesson that Warren Buffett loves to talk about; When it comes to assets, you should always buy low and sell high.
Buying at the Peak
In November of 1999, Larry Dolan agreed to purchase the Cleveland Indians for a then record price of $320 million. The previous owner, the beloved Dick Jacobs, had purchased the team with his brother for $35 million in 1986 and was more than happy to walk away with a cool $285 profit 13 years later.
At the time, the price seemed like an OK deal. The Indians were one of the best franchises in baseball, coming off two World Series appearances over the previous five years and they were in the midst of a record breaking streak of selling out every home game. As a result, revenues were high and the team was highly profitable.
The Good Times End
But we would soon find out that the great mid 90’s Indians were the result of a perfect storm of good fortune that would soon be winding down. For one thing, the economy in Cleveland was booming. People were more than willing to spend their disposable income on sports tickets. And when it came to buying sports tickets, the Indians didn’t have much competition in town. The Browns had been relocated to Baltimore leaving no football competition for three seasons and the Cavaliers were horrible. The Indians also had the luxury of being in a brand new, state of the art stadium that people loved coming to see. Finally, they were fortunate enough to play in a horrible division, meaning they made the playoffs every year with little trouble.
Within a few years of the Dolans purchasing the team, the economy collapsed, the Browns returned, the Cavs drafted the best player in the NBA, the mystique of the new stadium wore off and the division got much better. As a result, attendance began to drop dramatically.
By the mid 2000’s, the Indians had gone from the highest attendance numbers in baseball to one of the lowest. This previously profitable asset became a perennial loser. This caused the owners to spend less money on talented players, which caused the team to be worse, which caused even less people to come to games, etc. etc. It was a never ending cycle. The owners would promise to spend more money when the team was ready to contend again. The fans would promise to show back up when the spending and contention happened. Neither side fulfilled their promise and the Indians had mostly bad seasons playing in front of tiny crowds.
This past offseason the Indians received some serious TV revenue, finally spent some money on player upgrades, fielded a pretty good team and as a result are in contention at the end of the season for the playoffs. Unfortunately, the damaged relationship with the fans isn’t repaired. They still refuse to come support the team. Whether the Indians make the playoffs or not, they are likely to go right back to a bottom payroll team that is no good on the field.
Buy Low, Sell High
So what’s the business lesson in all of this? The old advice Warren Buffett has been giving for 50 years is true, always buy low and sell high when it comes to assets.
Larry Dolan wanted to purchase a sports team in 1999. He had been rejected on his offer for purchasing the Browns a few months earlier and as a result he went all in on the Indians. After his initial bid of $285 million was rejected, he offered the highest price ever given for a baseball team and Dick Jacobs accepted it before Dolan could change his mind. But Dolan hadn’t done his homework. He didn’t realize the asset he was buying was at its highest point and would soon come crashing down quickly. Had he simply taken a closer look at what was driving the success of the asset he was about to buy, he would have realized it wasn’t going to sustain itself.
Larry Dolan bought high, Dick Jacobs sold high and the result is so many continuous lows for the Indians and their fans that no one will attend the games even in winning years. Let this be a lesson to all of us when it comes to purchasing business assets: Buy low. Sell high. Do your homework. What appears to be a great purchase may have trouble lurking just below the surface.