Photo credit @AlexKennedyNBA
Patrick Causey, on Twitter @PhillySportsJD
Stick with me for a moment.
Bill Miller, the fund manager of Legg Mason, a global investment management firm with over $700 billion in its portfolio, often tells a story that reminds me of the rebuilding strategy the Philadelphia 76ers have undertaken with Sam Hinkie in charge.
As the story goes, Miller was a young investment manager pitching the shares of R.J. Reynolds, which was trading at four times its earnings, to an institutional money manager in Boston.
When he finished, the chief investment officer said: ‘That’s a really compelling case, but we can’t own that. You didn’t tell me why it’s going to outperform the market in the next nine months."
Miller responded that he did not know the answer, but that it was highly probable that RJ Reynolds would do well over the next three to five years.
The officer replied: "How long have you been in this business? There’s a lot of performance pressure, and performing three to five years down the road doesn’t cut it. You won’t be in business then. Clients expect you to perform right now."
Miller responded: "Let me ask you, how's your performance?"
He said: "It’s terrible, that’s why we’re under a lot of performance pressure."
Miller seized on this point: "If you bought stocks like this three years ago, your performance would be good right now and you’d be buying RJR to help your performance over the next three years."
Miller is talking about the benefit of playing the long game when everyone else is looking for short-term gratification. It's a market inefficiency in its own right, something that can be exploited if you are willing to sacrifice marginal short-term gains for significantly higher returns in the future.
This truism applies to whether you are running a small business, a billion dollar hedge fund, or an NBA team.
Which brings me to the Philadelphia 76ers and Sam Hinkie.
Even after two years running this team, Hinkie remains a mystery wrapped in an enigma.
He rarely speaks to the media and safeguards the Sixers' plans for free agency and the draft like they are matters of national security. But we have been able to gain some understanding of the philosophy to which Hinkie ascribes by watching him work.
We know that Hinkie relies heavily on analytics.
We know that Hinkie is a complete basketball junkie. As his former boss, Houston Rockets G.M. Daryl Moorey says: "He watches more basketball than anyone I know."
We also know that Hinkie likes to exploit market inefficiencies. His business acumen — he has an M.B.A. from Stanford — allows him to look for and take advantage of undervalued assets — like second round picks — that other teams have not figured out.
Perhaps the biggest inefficiency in the NBA market he has discovered, however, isn't second round picks or drafting long and athletic players that cannot shoot.
It's patience.
As Hinkie said after this year's draft: "We're playing the long game here."
That sentiment has been echoed by the Sixers head coach, Brett Brown: "We talk often about having a very, very long lens." "This is still a three-to-five-year plan."
The NBA is a win-now league. Most owners do not provide their general managers and coaches the luxury of taking the long-term view. It's why you see the Kings, Knicks, and Nets of the world routinely at the bottom of the standings.
They are the hedge fund manager from Boston. They need a quick fix now to fix the quick fix that backfired before.
The Sixers used to be a part of that group. And until now, the only way the Sixers, or any other team at the bottom of the standings, could break that vicious cycle was to hit lottery gold. To be that one franchise that was fortunate enough to not only have the ping pong balls fall their way to get a top pick, but also be lucky enough to have a franchise caliber player available when they get that pick.
But if we take a step back and asses the big picture, we notice that Hinkie was able to convince the 76ers' owners that there was a huge advantage to playing the long game while everyone else was looking to cut corners.
It wouldn't be pretty on the short term. It wouldn't be immediate. As Hinkie recently said, it would not even be linear: "What we look at is, how do we add to what we're doing in a way that gets us closer to our goal? We don't think that it will necessarily be linear — that every year you will add five wins and after 10 years you will get to 50. That's not the way we think about the world. We think that it comes at fits and starts, and you have to be prepared to put yourself in a position that you might be able to make big leaps."
That is the genius of the Sixers strategy. Hinkie recognized this market inefficiency. And the Sixers' owners were bold enough to take advantage of it.
It's why the Sixers could absolutely pillage the Sacramento Kings last week in a trade that could go down as one of the most lopsided trades in NBA history. The Sixers were able to get the 8th overall pick in last year's draft, Nik Stauskas, a future first round pick, and the right to swap first round picks in each of the next two drafts, all because the Kings desperately wanted to unload the contracts of Carl Landry, and Jason Thompson, who were owed just over $13 million combined.
The Kings made this move so they could go out and sign Rajon Rando to a 1 year contract, hoping it would somehow quickly turn them from a team that has not won more than 30 games since 2008 into a playoff contender.
It's why the Sixers could take Jrue Holiday, a midlevel point guard in the NBA, and turn him into Nerlens Noel and a future first round pick from New Orleans. And then take that future first round pick and turn it into Dario Saric and a 2017 first round pick.
The initial trade was criticized at the time, especially since Noel was going to miss the entire season with an injury. But would any NBA team in their right mind trade Noel, Saric and a 1st round pick for Holiday now? Of course not.
And it's also why the Sixers could get a first round pick for taking on JaVale McGee's $12 million contract. Sure, they gave up the rights to Cenk Akyol in the deal as well. But Akyol is a 27-year old Turkish player who was drafted in 2005 and has about a good a chance of playing in the NBA as I do.
The NBA has become incredibly efficient in the short-term. Teams are increasingly relying on analytics to look to exploit any short-term market inefficiency available to them. But the one area that NBA teams have not taken advantage of — because of self-imposed "win now" limitations — is the long term play. It is one of the few market inefficiencies left.
Sam Hinkie and the 76ers have been able to use this market inefficiency to their advantage over the last two years when making trades with teams that are looking for a quick solution. And while the returns have not been immediate, they should pay dividends down the road. Which can only mean good things for the Sixers and their fans.
