The Dumbest Bet in Sports: 6 Reasons to Not Buy Stock in a Professional Athlete

Houston Texans RB Arian Foster has sold a 20% share in his future income to a new company. Foster is old (and knows what he's doing). The company is young (and doesn't).

Kiss your money goodbye | Reuters

Arian Foster, the star running back for the Houston Texans, is now the first athlete to go public. He has sold a 20 percent stake in his future income to Fantex Holdings, a stock market for buying and selling shares in the earnings potential of athletes.

It works like this. Arian Foster gets a check for $10 million. In exchange, Fantex gets a 20 percent "tax" on all future Arian Foster income. That means if Foster earns more than $50 million starting now, Fantex and its investors stand to make money. If Foster earns less than $50 million, he just signed a sweet deal.

Actually, forget if. Foster just signed a sweet deal. With just over $20 million left on his current contract ending in 2016, Foster will be 30 when he's up for another contract. For work-horse backs like Foster who carry the ball 300-400 times a season, 30 years old might as well be 90. He will never get another $20 million contract, which means anybody betting in his future is hoping Foster gets on ESPN and slowly works his way toward $50 million over the course of the next few decades.

But let's dig deeper. There are at least three sports reasons and three business reasons why Arian Foster is an awful investment for you. Here are the sports reasons, moving from the general to the specific.

1. Athletes in high-contact sports have highly uncertain careers. Anybody who has ever played fantasy football knows how rare it is to make it through four weeks without multiple injuries to your starting line-up. It's one thing to "invest" in 14 players in a paid-fantasy league and hope enough of them will stay healthy to field a competitive fantasy team. It's another to invest all of you money in one player and hope he's immune to all head, arm, and leg injuries during the course of your investment.
    
2. Running backs are not immune to head, arm, and leg injuries! In fact, they are among the most susceptible. Especially every-down backs like Foster, who not only carried the ball 405 times last year including the playoffs (more than any other back) but also caught a handful of passes in heavy traffic each game. Foster just suffered an injury last year that kept him out of the pre-season and slowed him in the first three weeks of the season. 
    
3. Foster, a 27-year old running back, isn't just coming off an injury and slogging through a mediocre year (for him). He's also getting old in running-back years. Of the best running backs of the 2000s (let's take: Shaun Alexander, Clinton Portis, LaDanian Tomlinson, Edgerrin James), none had more than two seasons with more than 1,000 yards and 4.0 yards-per-carry or above after they turned 27. For some, like Alexander, the numbers fell off a cliff around 28. For others, it was a slower tumble down the back hillside of their career. An elite 29-year-old back is an exotic talent. For Foster to make more than $50 million over the rest of his career, he'll probably need endorsements that could only come from a Super Bowl championship. That won't happen unless he's unexpectedly traded to a contender in the next 24 months.

And here are the business reasons, moving similarly from the general to the specific.

1. Activist investing is extremely difficult and generally ill-advised, and hey-I-read-an-article-about-this-cool-company-on-Google-News-time-to-pull-up-ETrade investing is practically impossible and extremely ill-advised.
    
2. It's always a risky to put your money in risky start-ups that tell you "we don't really know how to make money and we don't have any experience in this business." But that's exactly what Fantex tells its investors in its S-1 document. Every IPO prospectus is required to list risk factors, and Fantex's risk section isn't blinking red light so much as an incapacitating strobe-light sequence of the deepest red:

-- We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future. 

-- We have a very limited operating history ...

-- To date, we have not generated any revenues or cash flow from any brand contract...

-- We will need to obtain additional funding to acquire additional brands and we may also need additional funding to continue operations. If we fail to obtain the necessary financing, or fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and we may be forced to significantly delay, scale back or discontinue our operations.

-- Our principal source of cash flow for the foreseeable future will be derived from our brand contracts. 

-- We do not have any experience managing brand contracts and we do not have any historical performance data about our brand contracts.

Dear lord. In short: We're a young, unproven company losing lots of money, relying on a business that we don't have any experience in and that we cannot predict with any accuracy.

3. When you buy a stock of Arian Foster through Fantex, you're not just betting on Foster, the older, proven NFL back. You're betting on Fantex, the young, unproven company losing lots of money, relying on a business that they don't have any experience in and that they cannot predict with any accuracy.

Per the prospectus:

While we intend for our Fantex Series Arian Foster to track the performance of the brand, we cannot provide any guarantee that the series will in fact track the performance of such brand.

Wait, what? So Arian Foster stock isn't really Arian Foster stock? Go on...

The board of directors has discretion to reattribute assets, liabilities, revenues, expenses and cash flows without the approval of shareholders of a particular tracking series, which discretion will be exercised in accordance with its fiduciary duties under Delaware law and only where its decisions are in the best interests of the company and the stockholders as a whole.

Essentially, the board has the right to dilute your shares if the company's investments turn sour. Felix Salmon translates into even simpler English: If Foster fails, investors lose; if Fantex fails, investors lose.

The upshot here? Fantex is a fun story. Do not become a character in it. Keep your money in that index fund.