What happens when you mix sports, Bernie Madoff, and compounding interest? Only the best obscure holiday in the entire world (closely rivaled by Dyngus Day, of course)!
Today is Bobby Bonilla day! For those of you who don’t know, Bobby Bonilla is an ex-Mets baseball player who had two separate stints with the team, from 1992-1995 and in 1999. As a six-time all-star and one-time world series champion with the Florida Marlins, Bobby Bonilla was a pretty good baseball player; however, during his second go-around with the Mets, underwhelming performances and tensions with the manager led to his release at the end of the season.
So why does this guy, of all baseball players, get a special holiday named after him? Well, that has to do with the fact that he is the 14th highest-paid player among the current active Mets roster, and he hasn’t played an inning of baseball since 2001.
At the end of the 1999 season with the Mets, the team decided to cut bait with Bobby Bonilla but still owed him $5.9m at the time. Bobby’s agent, Dennis Gilbert, came to the Mets with an interesting proposition: hold on to your $5.9m, for now, and pay Bobby later down the road. Like…..twelve years down the road, starting in 2011.
The catch? In exchange for holding onto the roughly $6m dollars now, the Mets ownership (the Wilpons) would owe Bobby Bonilla $28.9 million, spread out over 25 years. Starting in 2011, the Mets would cut a check for $1,193,248.20 million every July 1st until 2035. Hence, Bobby Bonilla day! The way $5.9 million turns into $28.9 million is through compounding interest: Bobby agreed to wait on the payment of the money, but under the condition that his total payout would grow at an 8% interest rate over time.
Think about that for a second….if you could guarantee an 8% rate of return on any investment for the better part of 35 years, would you do it? Of course you would! You should do that on any sizeable guaranteed rate of return, immediate payments needed withstanding. That is putting your money in an investment that has a 100% of growing. This gets to one of the most important pieces of investing, the same reason you save for retirement early: compound interest is your friend. If you save $1000 now and get 5% back, next year you have $1,050 – netting $50. Now that you have $1,050 with 5% back, the following year you now have $1102.50 – netting $52.50! Each year, you earn more and more, growing at an exponential rate.
Bobby Bo’ knew the beauty of this, so he gladly accepted the deal. Furthermore, retiring from baseball in 2001 and cashing a check for over 1 million dollars for 25 years isn’t half bad either.
So….$28.9 million compared to $5.9 million…seems like a shitty deal for the Mets, right? Well, sort of.
The Good
By saving the 5.9 million at the time, the Mets were able to use that money to spend on other top-notch players that helped them get to a World Series the year after Bobby Bonilla’s departure. Alternatively, if they put all 5.9 million dollars in a financially sound investment (something that provides an 8% return, let’s say), the Mets would have 14 million dollars before they even started paying Bobby in 2011.
The Bad
They never actually won the World Series, losing to the Cardinals four games to one that year.
The Ugly
Unfortunately, what likely happened was they invested some of that money (or all of it) into the Bernie Madoff Ponzi Scheme and lost it all. Madoff was Mets owner at the time Fred Wilpon’s longtime associate, and Madoff’s ties to the Mets’ day-to-day operations were extensive.
So, all in all, was this a good deal? Well, it depends on how you look at it. For the Mets, hindsight is 20-20. Deferring monetary payments, at the right interest rate, is often a savvy move because the current value of that money can be used in possible investments that could provide greater returns down the road.
Let’s say I owed you $100 last year on July 1st, but instead of paying you back then, I promised to pay you back $150 in one year (today) – if I decided to put all that money into Tesla that day, I would have $303 now. Once I paid you back, I would net +153 dollars from that loan and you would net $50. A win-win! Not all deals are that drastically positive, but that is the idea behind deferred payments.
However, as we now know, deferring the payments to invest in Bernie Madoff wasn’t the right move, if that is ultimately what they did do with that money. The lesson here? The market is uncertain, and anyone that guarantees you 10% returns over long periods is full of shit. No one ever knows what can happen.
And what about Bobby Bonilla? Well, if he took the lump sum of 5.9 million dollars in 1999 and invested it all in Amazon, he would have somewhere around 7 billion dollars. Would he have done that? Probably not. If he needed all the money immediately for whatever reason, that wouldn’t be great either, but seeing as he chose to defer that is likely not the case.
My thought? Anytime you can guarantee 1.2 million dollars every year for 25 years, that sounds like a pretty good deal to me.
Happy Bobby Bonilla day, Bobby Bonilla. You might not have deserved all that money for your baseball accolades, but you definitely earned it for your financial savvy.
