I feel a little foolish posting this now that it’s been confirmed that Steve Ballmer is buying the Clippers for $2 billion since when I first wrote this draft in the aftermath of the whole Donald Sterling racist diatribe people thought he would “only” get $500 million or so. For this post, however, let’s still assume that selling the team was not his desired outcome. After all, he has plenty of money, there is very little risk of the team dropping in value, and from a tax perspective and given his age and declining health, his estate would have been much better if his wife had inherited his share and she would have gotten a step up in basis (at least that is my understanding) and then taxes would have been deferred until after her death when the estate is settled. And, most importantly, he loved being the owner of the Clippers.
I think there might be some pertinent lessons from this whole sordid affair that can be applied to make us better investors (and dare I say better human beings?) Before touching on that, let me draw some parallels between Sterling’s fate and classic tragedies.
After following the Donald Sterling implosion and listening to the audio with he and his supposed girlfriend, I couldn’t help but think of Shakespearean tragedies. Aristotle was one of the first to analyze tragedies. From his perspective, he believed that what ultimately made the series of events tragic is that the individual involved was generally a good person. Even without the release of the sordid audio, I didn’t have the feeling that Sterling was such a good person, especially after having lived in southern California for a long time and seeing how he operated the Clippers, the obnoxious self-promotion of himself and his business, and the controversial business practices he was accused of over the years in his apartment business. These factors took the Aristotelian tragedy off the list as a model to study to help put in perspective what transpired with Sterling.
Obviously, Shakespeare is considered the greatest writer of tragedy the world has known. Hamlet, King Lear, Othello, and the list of immortal, tragic figures goes on. Rather than just focusing on Shakespeare, however, I wanted to delve into a more academic analysis of the characteristics of tragedies. Northrop Frye is considered one of the most important literary critics of the 20th century. His tour de force was his 1957 book Anatomy of Criticism.
Fatal Flaws – 5 Stages of Tragedy
The tragedy lies not so much in the betrayal but in the isolation of the tragic figure. According to Frye, there are five stages of tragedy:
Encroachment – Protagonist takes on too much, makes a mistake that causes his/her “fall.” This mistake is often unconscious (an act blindly done, through over-confidence in one’s ability to regulate the world or through insensitivity to others) but still violates the norms of human conduct.
It seems like Sterling created a bubble in which he lived by his own rules and had his own norms. He was a shameless self-publicizer and brazen contributor to charitable organizations that would serve to perpetuate his own myth as a great man of the community and a supporter of all people despite some very brass knuckles business practices that not only displayed a callous respect for people, but apparent racist tendencies as well as has been well documented by discriminatory housing practices and the firing of Elgin Baylor. I think that Kareem Abdul Jabbar’s opinion piece is well worth reading to learn more about these red flags. Up until recently, he had milked the Clippers without any care for the product he put on the court. His goal was to create a highly profitable business, fans are damned. He was very successful at doing this as the value of the organization has gone up by an estimated 17 fold since he bought the team in 1981. It could even be much higher given the prospective list of billionaires who have expressed an interest in buying the team. It is an enormously valuable franchise and Sterling must be commended for purchasing an asset at a relatively low value (when it was the San Diego Clippers), moving it to one of the top markets in the country, and moving to the Staples Center when it opened. These three actions helped create tremendous value for him and his family.
Sterling was used to controlling his own environment by never having outside investors and buying loyalty and minimizing community backlash for his very bottom line focused business practices. His hubris in having his racially mixed archivist/girlfriend record him for over 100 hours, including the racist ramblings that were publicized without him thinking there would be any consequences is the perfect example of his insensitivity to others and his belief that he could regulate the world.
Complication – The building up of events aligning opposing forces that will lead inexorably to the tragic conclusion. “Just as comedy often sets up an arbitrary law and then organizes the action to break or evade it, so tragedy presents the reverse theme of narrowing a comparatively free life into a process of causation.”
It seems to me that the opposing forces building up were his inherently, slave master type racist views, and the fact that much of his business activity involved minority customers and employees, and a mixed girlfriend on top of all of this. There is no way, especially with an increasingly mentally impaired, isolated, 80-year old man, that these could remain unreconciled without a cataclysmic event. Despite having a black coach, paying millions to black basketball players, and almost receiving another award from the NAACP, Sterling harbored very deep-seated feelings about the inferiority of black people. It’s as if he had the attitude that they can work for me in order to make me money and they can be used to take care of my needs sexually, but I do not want to be associated with them on an intimate level. They have their place and it’s not with whites unless it’s to provide me with what I need: money, power, and pleasure. These opposing forces eventually aligned in ways that lead to a tragic conclusion.
Reversal – The point at which it becomes clear that the hero’s expectations are mistaken, that his fate will be the reverse of what he had hoped. At this moment, the vision of the dramatist and the audience are the same. The classic example is Oedipus, who seeks the knowledge that proves him guilty of murdering his father and marrying his mother; when he accomplishes his objective, he realizes he has destroyed himself in the process.
I would hope that Sterling would get the picture that his life as he has known it and tried so hard to methodically control and direct with his money, power, and publicity, will never be what it was, and much of what he worked for is gone forever with the lifetime ban from the NBA and shame he has brought to himself.
Catastrophe – The catastrophe exposes the limits of the hero’s power and dramatizes the waste of his life. Piles of dead bodies remind us that the forces unleashed are not easily contained; there are also elaborate subplots (e.g. Gloucester in King Lear) which reinforce the impression of a world inundated with evil.
An estranged wife, a son who died of a drug overdose, an organization, city, and country that reviles him. This is a pretty catastrophic ending and does dramatize how so much of what he tried to create has been wasted with a lot of collateral damage.
Recognition – The audience (sometimes the hero as well) recognizes the larger pattern. If the hero does experience recognition, he assumes the vision of his life held by the dramatist and the audience. From this new perspective, he can see the irony of his actions, adding to the poignancy of the tragic events.
Only time will tell if Sterling has that Road to Damascus moment and experiences a powerful, life-altering transformation where he realizes who he really has been and what he has done. Perhaps there can be a form of positive rehabilitation but I must admit that I think this is very wishful thinking. The one positive is that it seems to have had a unifying effect on the country. There was such overwhelming outrage that has been shared across all ages, cultures, and races and exposed how insidious such views of Sterling can be, that maybe it will be a positive catalyst to help bring people together. And from an NBA and Los Angeles perspective, perhaps this will finally result in a much better owner for the Clippers after 33 years of the terrible reign of Donald Sterling.
Sterling has created an investment empire that on the surface is the holy grail: Complete control and beholden to no one. It is self-funded without any outside investors to report or answer to. At CWS we like to say we want to eat when we’re hungry and sleep when we’re tired. In other words, our goal is to do what is smart without regard to any outside influences or financial needs created by having a machine that needs to be fed by transactions because of overhead that is much greater than recurring revenue. We have done a good job of managing our overhead prudently and, although we have outside investors, we believe that we have created a very strong alignment between their objectives and how we think value can be added and how long it will take. We want to look at the world objectively and rationally and when it is time to hit the brakes we don’t want any financial needs or pressures to get in the way of making this decision. Conversely, when it is time to go like mad we want investors who see it as an opportunity as well and have faith in us to get on the train as it’s leaving the station.
We have invested in an infrastructure that offers us diverse ways of capturing value in the apartment industry. We can buy properties as well as build them. We own properties in suburban areas, urban ones, student communities, newer ones, a few older ones in outstanding locations, and we have the ability to reposition them by implementing upgrade programs. These core competencies allow us to look at the apartment investing opportunity set very rationally because we are not pigeon-holed into one skill set which may lead us to suffer from Charlie Munger’s “man with a hammer syndrome” in which every problem looks like a nail. Unlike Sterling, however, we do not have the ability or “luxury” of carving out a bubble of isolation in which we have no need for outside forces to take into consideration when making decisions. If we conduct our business in very aggressive ways that can generate negative publicity or skirt the edge of legality and ethics, virtually every one of our investors will be very upset, even if this generates strong profits in the short run. We are exposing them to risk they didn’t sign up for and this is not how they want their investments to be run. They want to win, but fairly and ethically.
Sterling is not beholden to anyone to create important ethical checks and balances. His goal was to make money his way and he structured his business so that no one will get in the way of this. This can be a wonderful way of running one’s business and living one’s life if it doesn’t end up creating a King Lear type isolation that can lead to warped thinking and terribly negative isolation. Unfortunately for Sterling, this has been the case and his hubris has led to a very tragic ending. Sterling is a very important case study for CWS. We believe we have the best of both worlds. The checks and balances of reporting to outside investors keep us constantly vigilant that we are looking at the world in a rational way, for if not, then we will not have these investors for long. We also have the satisfaction of enhancing their lives in very positive ways by making the experience of investing with CWS interesting, educational, and of course, profitable.