Monday, November 3, 2008

Always Be Closing

With the Iverson trade, Joe Dumars proved again today why he is the best general manager in the league. In the last 8 years, he has completed the following deals, each of which was seen as a risk at the time. By risky I mean that the possible volatility of outcomes was wide; the deal could have been a strikeout, or a home run. What’s more, in several of these cases, observers saw only the negative possibility, and not the positive. Other than the Darko selection (and perhaps letting Okur migrate to Utah), each of these decisions was ultimately vindicated. Only time will tell whether the last two on this list were wise decisions.

· Trading an injured Grant Hill for Ben Wallace (who?)
· Hiring Rick Carlisle (who?)
· Signing journeyman Chauncey Billups
· Trading Jerry Stackhouse for Rip Hamilton
· Drafting Tayshaun Prince over NCAA champions Lonny Baxter and Carlos Boozer
· Drafting Darko Milicic (who?) over Wade, Bosh, Anthony, Hinrich, Ford
· Dumping Carlisle for Larry Brown after two 50-win seasons
· Trading for the fiery Rasheed Wallace
· Letting Mehmet Okur walk away for nothing
· Signing washed-up Antonio McDyess
· Dumping Larry Brown for Flip Saunders after two NBA Finals trips
· Drafting Amir Johnson from high school
· Trading Darko before he established his potential
· Letting Ben Wallace walk for nothing
· Drafting Rodney Stuckey over, among others, the All-American Alando Tucker and the top college shot blocker Sean Williams
· Re-signing Billups at $12 MM / year
· Dumping Flip Saunders for Michael Curry after three conference finals
· Trading Billups for Allen Iverson

A basic principle of finance is that consistently higher risk is required for consistently higher returns. Yet Dumars always seems to win these bets, save for the Darko selection. Were they truly risky? Perhaps with the benefit of ex post analysis we can see that contemporaneous observers were wrong about the possible outcomes of these deals. Perhaps Dumars has better information than the market: he clearly knew something about Hill’s ankle injury (and something about Ben Wallace's ability) that Orlando didn’t, and he saw potential in players like Billups and McDyess that no one else perceived. Or alternatively/additionally, perhaps Dumars always has a really good hedging strategy on his bets. Carlisle was seen as a tightass, but luckily Dumars was able to reach out to a Hall of Fame coach to replace him immediately when the players began to chafe. The first Billups signing in 2002 was surprising, but the contract sum was relatively low, and trading a former #3 selected point guard is not difficult. Darko was a risk, but teams always salivate over big men with untapped potential, so Dumars knew that he could easy dump Milicic on another team (the Magic again! … hmmm) if he didn’t quickly blossom. Rasheed Wallace was prone to explosions, but at the time of the February 2004 trade, his contract was soon to expire; at the least, Dumars could leverage him into a quick run to the Finals in a weak East. Amir Johnson was an unknown figure, but he was chosen late in the second round when there were no other obvious gems on the board, and Detroit’s deep frontcourt of the Wallaces and McDyess meant that Johnson could develop slowly. Sure, he might go bust, but then Dumars would not lose a lot of investment principal.

If Dumars wants to switch to a second career with Goldman Sachs, I am sure there is a seat waiting for him. Remember that only Goldman survived the subprime mortgage crisis unscathed... and they did it by some smart hedging.

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