Bluematter.

Following a reader's request, I've been meaning to post something on this for a while. But Austan Goolsbee at the NYT beat me to it (via Mark Thoma):

Answering why people buy teams turns out to be important to more than just sports fans. There is big money at stake.

After owners indulge their childhood fantasy of buying a team, they tend to switch to an adult perspective and start viewing the team as a business. And they typically conclude that it’s a bad business.

Should we really care that it’s a bad business? If a billionaire throws a lavish 60th birthday party, it costs a lot of money. But that doesn’t make it a bad business. It’s a party. It’s not supposed to make money.

Is a sports team really that different?

Owners’ complaints about losses leave out the basic fact that capital gains are profits, too. And when scores of grown men desperately want to buy sports teams, there tend to be big capital gains.

Take the Sonics. The team may have lost $60 million while Mr. Schultz owned it. But he bought it for $200 million in 2001 and sold it for $350 million five years later. So he ended up making something like $90 million (taxed at the favorable capital gains tax rate, no less) on top of the fame, prestige and free tickets he got while he was owner.

If the Cubs do, indeed, sell for $1 billion, Tribune will have earned an annual return of almost 15 percent since it bought the team for around $20 million in 1981. Given the company’s recent problems, it’s probably the best investment it ever made.

So owning a sports team gives budding billionaires local stardom and a big return — no wonder that they are lining up to buy these teams. The only question that remains, I suppose, is why the vanity value of teams keeps climbing. You might have thought that this value would be about the same whenever there’s a sale, so that the capital gain wouldn’t be such a big component. But because ever-richer guys are bidding against one another, there has been persistent inflation in team values.

Having a stake in most companies yields no utility to its owners by itself: what matters is the financial rewards the investor is looking forward to. That said, a sports team (much like a charity) can survive and prosper even if the financial returns on offer are consistently below those of 'normal' companies.

Goolsbee makes a good point, in that when you buy shares in a sports team what you get (and pay for) is more than just a stake in future company profits and expected capital gains. Buying a controlling interest earns you status, and even fans owning a few shares acquire the privilege of owning a piece of their favourite team.

So should you buy yourself shares in a sports team? As is the case with 'ethical' or 'islamic' funds, the question you should really be asking is whether you value owning these shares in itself as much as the marginal investor. If you believe markets are efficient and you are not a fan or status-seeking multibillionaire, the answer is simple: steer clear.