Money world

Michael Phelps captivated not only the nation, but most of the world during his quest for a record eight gold medals during this year’s Olympics. He helped bring swimming to the forefront of the games as part of the 4×100 freestyle relay team that took the gold in an amazing finish, then spent the rest of the games breaking world records to leave the games with the most gold medals won at a single Olympics.

As his popularity grew during the Olympics, the sponsors who took a chance on his success were well-rewarded. For example, The Wall Street Journal reported that Speedo sold out of its Phelps jerseys and experienced significant demand for the white parkas worn by Phelps. The demand came despite the fact that swimmers don’t wear jerseys and the company did not intend to sell the parkas.

Other sponsors weren’t quite so lucky with the athletes they were promoting. Since winning the men’s 110-meter hurdles during the 2004 Olympic Games, Liu Xiang had seen his popularity skyrocket in his home country of China. Through advertising deals with the likes of Coca-Cola, Nike, Visa and Cadillac, Liu earned more than $23 million in 2007, even outpacing basketball star Yao Ming.

Those backing Liu saw heavy marketing campaigns fall by the wayside when the renowned Chinese hurdler backed out of the games due to an injury. Sponsors have been quick to publicly profess their continued support for Liu, but as The New York Times pointed out on Aug. 19, "Marketing experts say Mr. Liu will probably be left out of advertisements that celebrate China’s remarkable achievements in Beijing this summer."
What does Olympic marketing have to do with investing? "Sponsoring an individual athlete is ‘like you are highly leveraged on one stock,’" IMG Consulting’s Marcus John told The Wall Street Journal.

Sponsors take significant risk when planning campaigns around individual stars cash advance. In the same manner, investors take significant risk when building their portfolios around single or small numbers of stocks.

Sure, the chance is there for the returns of MasterCard stock, which rose 52.3 percent for the 12-month period ending July. It also means there’s a chance for the returns of Circuit City, Marshall & Ilsley or Sirius XM Radio stock, which are down 82.6 percent, 51.4 percent and 46.8 percent respectively during the same time period.

With sports marketing, sponsors at least have a chance to salvage their campaign when things don’t go according to plan. After Liu’s injury, Nike ran full-page ads in Chinese publications featuring the hurdler and the caption, "Love sport even when it breaks your heart."

Investors often don’t have the same luxury. Their recourse is to stick with their stock until it rebounds — therefore taking even more risk — or cut their losses and accept them as the price paid for a painful lesson learned.

There is an alternative. Some marketers recognize the risks involved with promoting individuals, so they sign deals with dozens of athletes and count on a few of them to succeed, thus giving them their return on investment.

Investors have a similar option through diversification. By investing in asset classes and capturing the returns markets provide, they can avoid the uncompensated risks of individual stock speculating and be confident in the overall success of their plan.

Larry E. Swedroe is a principal and director of research of Buckingham Asset Management LLC.

www.bamservices.com

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