42 years ago, Magic Johnson left about $5.2 billion in Nike money on the table


If you watch the HBO series winning timeyou know Magic Johnson turned down a shoe deal with Nike — which would have ended up being worth $5.2 billion — to do a $100,000 deal with Converse.

(We’ll talk about that $5.2 billion in a moment.)

When I got out of college, all the shoe brands followed me – and this guy, Phil Knight, who had just started Nike.

All the other companies offered me money, but [Nike] couldn’t offer me any money because they had just started.

So he said, “Stock. I’ll give you a lot of stock.”

I didn’t know anything about the stock. I come from downtown. We do not know the stocks. [Laughs]

let’s talk math

Yes, $5.2 billion is a catchy number.

Yet not particularly accurate.

While Nike offered Johnson stock in the summer of 1979 (something I’ve written about before), the company didn’t actually go public at 18¢ per share until December 1980. The per-share value of offered shares is therefore clearly too high. .

Then there is the amount; winning time assume (if only because it makes the comparison easier) that Nike offered $100,000 worth of stock. The actual amount? Who knows.

And then there is this: winning time says Nike offers Magic a $1 royalty per shoe sold, but that’s likely double the actual amount. As Darren Rovell writes, the standard royalty at the time was 5% of gross; in this case, about 50¢ per shoe.

So yes: The winning time the math doesn’t work.

But Nike’s offer was still a potentially huge deal.

Since we don’t know how many shares Magic has been offered, let’s choose a round number to use as an example. Say Magic was offered $1,000 worth of stock. In Nike’s IPO, $1,000 would have bought 5,555 shares. The split adjustment changes the original 5,555 shares to 711,040 shares and the original price of 18¢ per share to 0.000004¢ per share.

Given that Nike stock recently closed at $135.87 per share, that means a $1,000 stock IPO purchase would now be worth over $96 million — and that’s not counting the value and the Compound power of reinvested dividends.

So you can certainly understand when Johnson says:

Boy, did I make a mistake. I still kick myself. Every time I’m in a Nike store, I go crazy. I could have made money off everyone buying Nikes right now.

Even if Johnson got “only” $10,000 worth of Nike stock, those shares would now be worth nearly $1 billion.

But that’s assuming he never sold

Imagine buying, say, $10,000 worth of Tesla stock. And then the stock doubles. And double again. Your original $10,000 is now worth $40,000. Do you keep holding on?

If you’re like me, probably not.

Science agrees. Search for Daniel Kahneman, author of the big book Think, fast and slow, indicates that losses are twice as powerful psychologically as gains. (For most of us, a bird in the hand really is worth two in the bush.)

This bias is understandable. A loss means giving up something we really have; not acquiring gain means giving up something theoretical rather than real. If we have a chance to win another $10,000 but don’t, it sucks. But if we have $40,000 and lose some or all of it, that really sucks.

So, I’m just guessing, but it’s safe to assume that Johnson would have sold his Nike stock somewhere along the way. Perhaps to avoid a potential loss, but more likely to fund one of many business ventures.

Because make no mistake: Johnson is an awesome entrepreneur.

And that suppose Nike would have become Nike

Magic’s Nike deal reportedly began in 1979. Was Nike able – in terms of finance, infrastructure, marketing, etc.? – to take full advantage of this agreement?

Compare to 1984, when Nike signed Michael Jordan. At that time, Nike wasn’t just thinking about signing an athlete endorser – it was thinking about building a brand.

Is Nike the company it is today without Jordan? Absolutely not. Nike’s three-year sales goal was $3 million; in fact, first-year sales generated over $126 million in revenue. Today, the Jordan brand generates around $4 billion a year.

And that’s just the money side; Jordan’s popularity – and the cool factor of Nike’s Jordan-centric advertising campaigns – drew other professional athletes to the brand.

Without Jordan, Nike probably wouldn’t be Nike.

Which means Johnson’s stock probably wouldn’t be worth that much.

All of this leads to hindsight bias (and unwarranted regret)

In 1979, Nike was an undercapitalized running shoe manufacturer trying to break into a larger market dominated by traditional brands. And Converse was the leading basketball shoe brand.

Would you refuse the dominant player $100,000 to bet on Nike? I will not have.

That’s the problem with hindsight: it’s easy to think you knew what to do. Take me: In the 1980s, my neighbor, a computer teacher, started a language-learning business from his living room.

That fledgling company was Rosetta Stone.

Of course, I could look back now and think, “Wow, I should have invested.” But it is now. At the time, I thought he was very nice but a little weird; I would like never have invested in his startup.

Only in hindsight does this seem smart.

As forgotten Apple co-founder Ronald Wayne, who after two weeks relinquished his stake in the company, a share of ownership that would today be worth $75 billion, puts it:

I never had any regrets because I made the best decision with the information I had at the time.

Magic made the best decision it could with the information – and the knowledge and experience – it had at the time.

In fact, you could say that the Nike experience sparked his desire to become a better businessman. Realizing what he didn’t know fueled his desire to learn, grow, develop, and build an incredibly successful portfolio of businesses and investments.

So maybe he regrets turning down Nike’s offer.

But he surely cannot regret what he did in response to this “mistake”.

And that’s the real lesson of Magic Johnson and Nike: past mistakes don’t define you.

What do you do after making a mistake? It is what defines you.

And determines your future.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.


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