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Investor Takeaways From The Movie "Air"
We recently enjoyed watching the excellent Ben Affleck directed "Air" on Amazon Prime. The movie follows the events leading up to the signing of NBA rookie Michael Jordan to a history-making shoe deal with Nike in 1984. This signing would end up being one of the most prolific endorsement partnerships in the history of business. The Air Jordan line propelled Nike into the behemoth apparel and shoe company it is today. We were both teenagers in the 80s, so this movie was also a nostalgic visit to an era laden with corded telephones, iconic rock music (Big Country, REO Speedwagon), monochrome green screens and gas-guzzling cars.

Although the ending of the movie should be no mystery to anybody, the intrigue comes from the journey to get there. There are spoilers in this post, so if you haven’t watched the movie yet, abort now and feel free to come back later.

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The movie follows shoe marketing executive Sonny Vaccaro (Matt Damon), vice president of marketing Rob Strasser (Jason Bateman) and Nike founder Phil Knight (Ben Affleck) in their pursuit of one or more signature NBA rookies to a basketball shoe endorsement deal. The movie is a dramatisation of events, so there’s sure to be some "cinematic liberties" taken. Nevertheless, there is important investment lessons that can be taken from this movie in the same way we consider Brad Pitt’s "Moneyball" to be a movie about analytics-based (evidence-based) value investing.

"Moneyball is really a value-investing book" - Seth Klarman

"Air" is set at a time when Nike was the clear market leader in the running shoe market, but only a distant 3rd place in the lucrative basketball sneaker market. Converse dominated with a 54% market share. Adidas followed with a 29% market share while Nike only had 17%. Nike struggled to attract NBA talent to endorse their basketball shoes. Michael Jordan wore Converse shoes playing for the University of North Carolina Tar Heels. His favourite shoe coming into the NBA draft was the Adidas shoe. Michael Jordan later recalls: "You know what, the thing is, I never wore Nike shoes until I signed the Nike contract"__.

In the movie "Air", we see Sonny Vaccaro, Rob Strasser and marketing colleagues Bill, Tim and Stan in a strategy meeting to review the current NBA draft prospects and who they’ll target for shoe endorsement deals. The top prospects (including Michael Jordan) all look like they’re either going to sign with a competitor or they’re not within reach of the budget. Vice President of Marketing, Rob Strasser, sets the parameters: "What we're going to do is we're going to focus on three names between pick 5 and pick 20".

Now we have the set-up for the whole movie. How will Nike’s basketball shoe division move the needle and gain market share when they’re up against competitor shoe companies who are bigger and better resourced?

Most of the narrative lessons written about the movie "Air" have focused on business and leadership. Those takeaways include:

  • The exponential value of the best athlete endorsement and branding: "A shoe is just a shoe until my son steps into it" - Deloris Jordan
  • The importance of compensation for rare talent through partnership and shared interests.
  • Expert leadership involves knowing when to delegate and trust your best subordinates. Although Phil Knight initially struggled, he eventually trusted Sonny Vaccaro’s judgement.
  • Thinking outside the box and a unique selling proposition is a competitive edge. While competitor shoe brands focused on athlete compensation and how they would market the athlete, Nike took a different approach and focused on tailoring a shoe line specifically to the athlete (Air Jordan).

Look closely and you can also spot some investor conundrums in the storyline. Nike had a total budget allocation of $250,000 budget to sign NBA players to shoe endorsements. After a contentious strategy meeting and another humorous impromptu meeting in the Gents restroom, Sonny Vaccaro heads off for a meeting with "Shoe Dog" Phil Knight:

Phil Knight: "How's the strategy meeting?"
Sonny Vaccaro: "Disaster"
Phil Knight : "Wonderful. What's the plan?"
Sonny Vaccaro: "Piss away our tiny allocation on 3 mediocre players. Again”

This is a similar dilemma facing an investor with limited funds. How do we allocate our funds when money is hard to come by and the outcome of investments is uncertain? Nike had the additional pressure of knowing they were facing make or break decisions.

"Sonny, we had an annual loss, I had to lay off a quarter of the f*g company. Do you know the whole basketball division is on the chopping block? The board wants me to fire everybody"
Ben Affleck as Phil Knight

Investors can look at the track record of a listed stock and extrapolate based on historical evidence. Historical trend affords some level of comfort. A rookie player coming into the NBA faces a much more uncertain future. Stars at college level don’t always translate at the NBA level. A rookie player coming into the NBA is similar to an IPO in the investment world. We can look at the historical track record and extrapolate, but we don’t really know how things are going to pan out until they perform in the big show (or the "Big Board" for stocks).

Sonny Vaccaro remained firm on his conviction to make a $250,000 concentrated bet on Michael Jordan, blowing the whole budget on one rookie:

Rob Strasser: "It's gonna cost too much money"
Sonny Vaccaro: "No, not if we bet it all on one guy"
Rob Strasser: "Too risky. You want the whole budget?"
Sonny Vaccaro: "Whole budget"
Rob Strasser: "Can't do that. We're gonna spread it across 3 or 4 players. I've said that"
Sonny Vaccaro: "We have 250K. We can get him for 250K"

When you build out your investment portfolio, should you make a narrow set of one or two concentrated bets or should you spread your bets wide? This is the vexing question and one that can only be answered by you, because your circumstances, skill-level and preferences are unique to you.

Sonny Vaccaro had the conviction to push for a concentrated bet and go all in on Michael Jordan because he had a particular insight the competitors overlooked. Sonny watched and rewatched the video of Michael Jordan’s winning championship shot as a freshmen against Georgetown. He noticed star player James Worthy ran towards the paint to make room for a relaxed and confident Michael Jordan to receive the ball and make the winning shot. The coach drew up a play to get the ball to freshman Michael Jordan and used it for the most important shot in the biggest game of the year.

When you notice things that are clearly overlooked by others, you have an edge. Those who possess a genuine edge in the stock market are best suited to manage a concentrated portfolio of their best ideas. That edge might come from having a deep knowledge of your profession or hobby. You must be careful not to exaggerate how much of an edge you have. Overconfidence is seductive, you must be completely honest with yourself. If you’re young and fairly new to the market, you should probably assume you don’t possess a measurable edge yet. I know it’s tough medicine to digest.

Nike were able to win over Michael Jordan with a pitch that focused on a dedicated "Air Jordan" shoe line. They also committed to a revolutionary partnership deal that included royalties on unit sales.

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During the movie, Phil Knight reveals an interesting opinion on how Nike manages risk:

Phil Knight: "Let me tell you how we do things at this company. We make careful, strategic, measured, thoughtful decisions with knowable outcomes"
Sonny Vaccaro: "Knowable and thoughtful and careful ... how'd you ever build this place Phil?"

Anyone who has read Phil Knight’s excellent autobiography "Shoe Dog" will immediately notice how Phil’s view on risk has evolved over time. When Nike was a struggling startup, Phil had to make a series of risky calls and was often forced to bet "the house" to just survive in the shoe market. Once Nike became an established shoe company, he’s more conservative about the risks he takes. He’s using hyperbole with the term "knowable outcomes", but you know his risk appetite is more conservative because he has more to lose.

Many investors follow the same pathway. Young investors might choose to YOLO-invest in a single stock to have a chance to grow scale fast. As investors grow older and portfolios grow larger, you start to think more conservatively and take measured risks so you don’t imperil most of what you’ve already built up. Your risk appetite will evolve as you age.

There’s even a behavioural economics lesson on hindsight bias. Twenty minutes into the movie, we see Sonny Vaccaro talking to a 7-Eleven Clerk about the upcoming NBA draft:

Sonny Vaccaro: "You not mad about Jordan?"
7-Eleven Clerk: "A guard? Hell no. I mean, he's averaging, what, 17 points which is like 10 in the NBA. Even the Bulls GM said that he wasn't going to change the team"

At the end of the movie, we see Sonny buying a Sports Illustrated magazine with Michael Jordan on the cover at the same 7-Eleven, being served by the same clerk:

7-Eleven Clerk: "Man, I can't believe we didn't get him"
Sonny Vaccaro: "Oh, you knew he was going to be good?"
7-Eleven Clerk: "I knew. We all knew"

Investing takeaways from this movie:

  • How you decide to spread your bets (diversify) and allocate your capital is one of the most important investment decisions you’ll make. Concentrated bets are higher risk in general, but you hit it out of the park if you get it right.
  • The level of risk you’re prepared to accept will evolve over time. Expect to be more conservative as you age and your wealth grows significantly larger. You’ll likely want to protect what you’ve already built.
  • Just like it’s hard to evaluate talent and future performance with any certainty, it’s also hard to evaluate stocks. We’re always forced to make decisions on incomplete information.
  • Play to your edge. Back yourself if you notice what others are clearly overlooking.

For the record, when I first started investing and faced the decision to invest all my capital on a single bet or spread it across 3 bets, I chose the 3 bets. That’s the number of individual stocks I bought when I first started investing in the US market with $5,000. I was young. I didn’t feel like I had any edge over the "silver-hair foxes" and their Bloomberg terminals.

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