Sam Hinkie’s resignation letter from the Philadelphia 76ers has been generating a great deal of discussion in value investing circles.  Partially this is because he refers to no less than 11 value investing heroes over the course of the 13 page letter – everyone from Buffett and Munger to Atul Gawande to Phil Tetlock.  Further, the tone and style of the letter will be familiar to regular readers of value investing tracts.  He borrows, among other things, the false modesty and tributes to the little people of Buffett’s annual letters[1] as well as the rational approach to decision-making from Farnam Street.[2]

But, to paraphrase Gertrude Stein, who will never earn a spot on value investing’s Mount Rushmore, is there any there there?  That is, when you look past all of the Howard Marks and Seth Klarman quotes and the tips of the cap to behavioral economics, does Hinkie’s letter have any real substance?

I would say, most emphatically, no.  In fact, I think the letter is nothing more than very glib ass covering from someone who failed both spectacularly and publically.   Let me explain.

Hinkie would have us believe that he is being ostracized by a basketball world that doesn’t want to hear the uncomfortable truths he is voicing.  Like Galileo before him, Hinkie sees himself as an iconoclast years ahead of his time and excommunicated by the Church of Basketball for voicing opinions it can’t handle.  “There has been much criticism of our approach,” Hinkie writes.  “There will be more.  A competitive league like the NBA necessitates a zig while our competitors comfortably zag.”

But, did Hinkie do anything that unconventional?

The Sixers were a bad team when Hinkie took over and he made it worse.  His strategy for improving them was a straightforward one:  trade off the minimal talent on the roster, stockpile draft picks and pick early in the draft.

On the surface, I guess, this looks pretty zany.  Why would a GM intentionally gut his team?  Bu, it is far more rational and conventional than it looks at first glance.  The NBA incentivizes losing.  This has long been known.  How?

To win a championship, a team must have one of the 10 or 15 best players in the league. There are just 3 methods for getting one of these players.  A team can trade for him.  A team can sign him as a free agent.  But, the most common means of obtaining one of these players is via the draft.  To get access to one of these players, a team will typically have to draft in one of the first two or three slots. How do you get one of these slots?  By being very  very bad.  The current NBA lottery system rewards the worst teams in the league with the best odds at landing the top pick.  Accordingly, over the years teams have consciously adopted a strategy of dumping whatever talent they have in hopes of bottoming out and securing an early draft pick[3].  This strategy is known by the somewhat pejorative term “tanking.” With early picks bringing on-court and financial success in exchange for those losses, it is a wholly rational approach to building a team. In this way, the opportunity to draft a great player gives teams an incentive to lose.

It is equally well-known that tanking is not a sure-fire path to success.  The Bobcats tanked the 2011-12 lockout season and ended up with Michael Kidd-Gilchrist instead of Anthony Davis. The Bucks, Raptors, and Blazers won the lotteries in years when most of the league found itself infatuated with big-man prospects who turned out to be the wrong choices at the very top.

Still, despite these problems, tanking is one of several paths to a superstar, and it may well be the best one.

While many teams have tanked, only Hinkie is grandiose enough to label it “The Process.”  And while many tanking strategies have failed and led to the GM being fired, only Hinkie is egotistical enough to spend six pages describing his approach to decision-making that led to his downfall.

Plus, that decision-making wasn’t all that great.

Beyond these considerations, it’s been 20 years since Billy Beane took over as GM of the A’s, 13 years since Moneyball was published and 5 years since none other than Brad Pitt portrayed Beane in the movie.  Applying value investing principles to sports franchises in 2016 is neither new nor novel.  Similarly, those who pursue such strategies are not burned at the stake or treated as heretics.  Virtually every NBA has an analytics department at this point.  Hinkie’s attempt to portray himself as a far-thinking but misunderstood visionary ring a bit hollow.

So, Hinkie took on a conventional strategy knowing the risks and it didn’t work out.  Maybe he planted seeds that someone else will get to harvest.  Maybe he didn’t.  Observers can argue the merits of his strategy.  But trying to portray himself as being punished for going against the grain is a bit of a stretch.  In a league where only 50% of GMs make it to year 4, ownership and the fans were actually pretty indulgent.   As a Sixers blogger wrote:  “When you have a nine-figure investment to protect and your team goes from bad to worse to very nearly the absolute pits, ‘Trust the Process’ only helps you ignore your eyes, your heart, and your common sense for so long. And it’s probably safe to say that no team exec has ever won fewer than a quarter of his games over a three-season span and had fans arguing over his job security to this degree before.”

Instead of this short-termism, Hinkie seems to suggest that the NBA should adopt a 10,000 year time perspective.  The purpose of the 10,000 Year Clock, Hinke writes, is to “make us all consider what the world will look like between now and then.  In return, we might be inspired to do something about it.”  Perhaps, one day the NBA will develop such a long term approach and from the vantage point of 12016, Hinkie will look like a genius.  Unfortunately, in today’s NBA, failure to execute a bottoming-out strategy and a three-year record of 47-199 gets you less admiration than you think you deserve.




[1] There is a particularly nauseating tribute to his assistant.

[2] The most shocking part of the letter is what does not appear:  a quote from Ben Graham, particularly the one about weighing machines and voting machines.

[3] Here is one website’s list of the top 10 tank jobs in NBA history: