Professional athletes make millions thanks to their competitive natures. Many end up losing those millions — thanks to the same competitive natures.
“They think that maybe somehow they can will their investments to work,” says Ed Butowsky, managing partner of Chapwood Capital Investment Management in Dallas. “And it doesn’t work that way.”
Warren Sapp is the latest prominent athlete to file for bankruptcy. Butowsky calls that “sad, but not surprising.”
Sapp, who played defensive tackle for the Tampa Bay Buccaneers and Oakland Raiders in a 13-year NFL career, owes roughly $6.7 million to creditors plus back child support and alimony against assets of $6.45 million, according to a Chapter 7 bankruptcy filing in Fort Lauderdale, Fla.
“These people are going broke for three reasons,” Butowsky says. “I’ll make it real simple: One, they put too much money in private equity investments. Two, they put too much money in real estate. And three, they spend too much.”
Butowsky offers this rule of thumb for athletes: “They should have 70% to 80% of their money — or 80% to 90%, depending on who they are — in public securities, things they can get into, and out of, very easily. They should not have any private equity investments or real estate investments until they have at least $3 million put away after taxes. And even then, they shouldn’t put more than 10% of that money in any one investment.”
Butowsky says the blame in these cases falls on financial advisers who give bad advice as well as athletes who spend outlandishly: “I don’t think the economy plays a role in this. Stupidity plays a role in this.”
Chapwood Capital will soon offer athletes an online financial-distress calculator. Some of the categories under expenses offer a hint of why things go wrong: Monthly money to friends and family, monthly child support, agent’s salary, discretionary monthly spending.
“Are most athletes having trouble and struggling? Yes,” Butowsky says. “You hear about the ones who file for bankruptcy. You don’t hear about the ones who feel, ‘Hey, life is really tough.’ There’s no form for that.”
Butowsky says he knows none of the particulars in Sapp’s case, “but I can almost guarantee you he put too much money in illiquid investments. … Only one out of 30 private investment vehicles actually work. And when they don’t work, you usually lose all of your money, not some of your money.
“It’s a lack of liquidity that’s killing these guys. Don’t be surprised if you see it again next week from someone else.”
By: Erik Brady
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