OPENING TIP
As you read this, the Draft is just hours away. This year, all signs point to some tumult, some indecision, and a bunch of trades.
If the draft coverage we read is any indication, Golden State wants out, the Grizzlies and Pistons want to move up, and John Collins will be playing for Sacramento, Portland, AND San Antonio next season.
ESPN resident genius Kevin Pelton has put together a handy table to help front offices figure out just what each pick is worth, so they don’t end up doing something embarrassing. Okay, someone is still going to do something embarrassing, but now we’ll know right away. For the visual learners among us:
There are a few takeaways here.
First, the value of the first 3 or 4 picks is MUCH higher than the rest of the draft (see below). And the first pick especially so. Your chances of landing a real star after 4 declines rapidly, so expect teams to pony up a premium to move up that high. Two recent examples from 2019:
When the Hawks traded up to snag De’Andre Hunter at 4, the cost ended up being picks 8,17, 35, and eating $13 million in dead money on Solomon Hill’s deal, an implied 65% premium.
When Phoenix traded down out of pick 6 in that same draft (the Wolves selected Jarett Culver) in order to take Cam Johnson at 11, they picked up the 24th pick and Dario Saric, which we think looks more like a 35% premium.
Second, a lot of our fellow analysts use shorthand like “a player is worth two firsts” as though each first rounder is a relatively homogeneous commodity. But the value of pick 1 in the first round is worth about 5 times what the 30th pick is. The 15th pick is worth 2.5 times as much as the 30th pick. And keep in mind when superstars are traded for those “first round” picks, those picks tend to be late ones, unless the team really botches things (shout-out to our man R. Pelinka).
Finally, Pelton uses the expected value of a pick in his model. While this makes sense, each pick is better thought of as a probability distribution of different outcomes. The chances of getting a star are high at the top but vanish to almost nothing in the 2nd (Almost! Recall one N. Jokic). Graphically, based on this ESPN+ article:
But enough boring charts. Let’s get to the good part: how to find value in the draft.
(DON’T) BUY THE DIP
As we covered on Monday, this years’ Finals was good. In fact, it was so good, we totally forgot about the global financial meltdown that has been slowly engulfing everything in its path.
The stock market is officially Bear Country, inflation is tipping 8%, and all of those lovely “decacorn” tech stocks have been flirting with record lows every session. But hey, at least all those once-in-a-lifetime crypto investments have continued to deliver once-in-a-lifetime returns, right? Right?
We know that some of you might be worried right now, but you can breathe easy, because you have before you the official STL Crossover Issue, in which we provide investment advice to our readers. For example, we are quite taken with this NFT: Chromie Squiggle #6460. It can be had as of press time for only $33,873.00, and we should point out that it is…
Simple and easily identifiable, each squiggle embodies the soul of the Art Blocks platform. Public minting of the Chromie Squiggle is permanently paused. They are now reserved for manual distribution to collectors and community members over a longer period of time.
Alright, that’s it for the investment advice1. We’re fresh out of ideas, although perhaps Trevor Lawrence should have listened to us the last time we didn’t actually provide investment advice.
Although, perhaps, when we said we were out of ideas, we spoke to soon, because there is one piece of investment advice that NBA front offices have started to follow. Tried and tested since 2009, the one investment adage that has dominated financial headlines during the past decade: Buy The Dip (BTD, or BTMFD if you are a serious investor).
Be it shares of Amazon, high yield debt, Bitcoin, or Pokemon cards, the answer, more often than not, has been to BTD.
There is an entire generation of hedge fund managers (adorably nicknamed “bull market babies”) who entered the market as bright-eyed 22 year-olds after the Great Financial Crisis in 2009 and have been rigorously conditioned to jam the buy button whenever growth stocks wobble.
It just feels right for GMs to get in on the game. How, you ask? Simple enough. Take former top recruiting prospects whose stocks have fallen, then hope that the attributes that made them so highly regarded can shine through an ugly season in college.
Last year, several organizations looked past mediocre seasons by top prospects and selected them anyway. Ziaire Williams was 5th coming out of high school and got snapped up at 10 (despite being mocked in the 20s or lower). But others fell further. Greg Brown dropped from 9 to 43, and BJ Boston dropped from 5 all the way to 51.
But were they punished too much? After all, they had the raw talent to be the most highly regarded recruits in the nation, and it’s easy to imagine that someone could underperform by simply landing in the wrong situation.
There are a number of players this year that are currently being mocked in similar circumstances.
Jaden Hardy, Patrick Baldwin, Caleb Houstan, and even Shaedon Sharpe were all at the tippy top of their high school classes at one point or another, but are now expected to come off the board at significantly discounted spots. Is there value to uncover here? Do we BTD?
In short, no.
The chart below tracks all the significant dips of top 10 HS players since 2003. Most of them don’t make it.
Yeah… Look, we get it. Who doesn’t want to be the contrarian investor/evaluator who steals, say… Patrick Baldwin Jr. with the 30th pick this year. Sure, he couldn’t manage more than 12 points a game while getting big usage at UW-Milwaukee, and yeah, he posted the 5th worst vertical in combine history last month. But just months ago he was the 5th ranked recruit in the country, and you saw something in him that made you sure he was headed for Canton, not Guangdong. It would be glorious!
But we should point out here that equity markets tend to eventually get back on track and rise over time (deep breaths), whereas close to half of NBA prospects have washed out of the league in 5 years. Our statisticians tell us that’s 1 in 2.
Our analysis looked at where the Top 10 high school prospects were drafted since 2003, the year LeBron came off the board and the oldest rankings we could find for our data set.
(This was a fun exercise, by the way. Looking at some years drives home just how hard this whole process is. Try 2010: 1. Harrison Barnes 2. Kyrie Irving 3. Josh Selby. Or 2018, when Bol Bol just edged out one Zion Williamson.)
Out of the top 180 high school prospects, 60 players were drafted at a significantly lower spot than their high school ranking. And how did the dippers perform? Well, out of the 60 Buy The Dip candidates, two (2) became All-Star caliber players, while 13 became solid starters (half of these were prep-to-pros from the early aughts when that was still a thing). There may still be hope for some of the younger guys. Michael Porter Jr. could get there… but only if his back problems—which are what precipitated his drop—allow him to.
So should NBA GM’s join your crypto enthusiast cousin and buy the dip? Nah. There are exceptions of course, but looking at the numbers, it feels like those shining high school performances are priced in just about appropriately, or perhaps even overstated a bit.
The top high school stars are ranked where they are largely because they look the part: they are giants among boys or incredible quick twitch athletes. Their rankings presuppose that they will take those tools and use them to sort out the basketball stuff. You know, shooting, dribbling, hard hedging on the pick and pop, etc. If the college tape suggests that they haven’t learned those skills, they drop, and if you think about it hard enough that makes sense. Can they continue to develop, or were they in a bad situation? Could be! And sometimes a player drops for injury or character concerns that prove to be non-issues. But the evidence suggests that those cases are very much the exception, not the rule.
Is your GM going to be the one who finds that diamond in the rough? Who says “I know Jrue Holiday struggled at UCLA, but there is a player here”? He might, but more often he’s investing in LUNA. Or Josh McRoberts. But if your team’s front office falls into this trap, fear not, we have a solution for you. See the STL Drinking Game.
STL INVESTIGATES: LOTS OF ALCOHOL
The NBA Draft is here, and it’s going to be great, because it’s always great. But you know what would make it better? The same thing that makes everything from parties to operating heavy machinery better: booze.
So strap on your goggles and play along with the 2022 STL NBA DRAFT DRINKING GAME.
1. Take a sip of Chablis if:
Jay Bilas says “freak athlete” “wingspan” “fluid”
Anyone says “sleeper”
Stephen A. Smith says “quite frankly”
2. Big gulp of your craft IPA if:
Jay Bilas says “big-time” “dynamism” “intangibles”
A prospect is shown holding his baby in the green room
Stephen A. Smith say “OF ALL TIME”
3. Shot of Jäger if:
Jay Bilas says “jumpability”
Anyone says “2 years away”
A white guy is called “sneaky athletic”
Anyone wears a bow tie
Any fan groups boo their pick
4. Pour 3 fingers of Pappy and go to bed if
Stephen A Smith says “Chad Holmgren”
Anyone gets compared to Aleksej Pokusevski
Dick Vitale cries on camera
Any prospects curse during their live interview
The Kings draft Patrick Baldwin Jr.
Alright, you’re set for a fantastic evening, and we can foresee no way that any of this could possibly go wrong.
AT THE BUZZER
Sure, you’ve seen the Warriors parade highlights, but have you tried Klay’s new cabernet? (SF Chronicle)
The Kyrie Missile Crisis is going great (ESPN+, $)
The Ringer’s free draft prospect cliff notes and The Athletic’s paid password protected draft prospect encyclopedia (Ringer; Athletic, $)
Not investment advice