Imagine you're Magic Johnson. You're 19 years old. You just won the national championship. You're the number one pick in the 1979 NBA draft. 

Because you're such a hot property, shoe companies are lining up to sign you.

How do you determine which deal is best?

When I first came out of college, all the shoe companies came after me -- and this guy, Phil Knight, who had just started Nike.

All the other companies offered me money, but (Nike) couldn't offer me money because they just started. 

So he said, 'Stock. I'm going to give you a lot of stock.'

I didn't know anything about stock. I'm from the inner city. We don't know about stocks. (Laughs.)

Boy, did I make a mistake. I'm still kicking myself. Every time I'm in a Nike Store, I get mad. I could have been making money off of everybody buying Nikes right now.

How big of a "mistake" did Magic make? 

Since we don't know how many shares Magic was offered, let's pick a round number to use as an example. We'll say Magic was offered $1,000 worth of stock. (Obviously the actual amount was much higher, but round numbers make it easier for math-challenged people like me.)

When Nike went public in 1980, one share cost .18. (Yep: 18 cents.) $1,000 would have bought 5,555 shares.

Adjusting for seven 2-for-1 stock splits over the years turns the original 5,555 shares into 711,040 shares, and the initial price of .18 per share into .000004 per share.

Since Nike stock closed yesterday at 92.16 per share, that means a $1,000 IPO stock purchase would now be worth over $65.5 million dollars.

Not counting the compounding power of reinvested dividends.

So it's no wonder Magic regrets not going with Nike; even if he had only received $10,000 in Nike stock, had he followed the Warren Buffett strategy and held for the long term that stock would now be worth over $650 million.

But there's another factor to consider.

Enter Hindsight Bias

Looking back, Nike's incredible success seems almost inevitable.

But at the time... Nike was an under-capitalized shoe manufacturer in a crowded marketplace filled with legacy brands, trying to expand beyond running shoes to other sports like basketball.

Few were betting on Nike to succeed. (Would you have been willing to take Apple stock in lieu of cash when the two Steves were still working out of the Jobs family garage?)

Magic made what certainly seemed like the smart play: For a kid from humble beginnings, entering an industry where careers are measured in years instead of decades, cash was -- and should have been -- king. 

Knowing what he knew then, the Converse deal made sense. With superstars like Julius Erving wearing its shoes, Converse was the brand leader.

In effect, Magic choosing to sign with Converse in 1979 was like Zion Williamson choosing to sign with Nike.

Looking back, Magic made a huge mistake. He signed a number of endorsement deals; he coud have used one to bet on the upside potential of a small challenger brand.

But then again, the shoe deal was sure to be his most valuable endorsement deal, especially for the first few years. Countless college stars wash out as pros; just as with Nike's later success, Magic's Hall of Fame career only seems inevitable in hindsight.

At the time, no matter how much he may regret it today... Magic made the smart decision.

That's the problem with hindsight bias. Looking back, you always know more than you knew then. You always place more weight on something you considered and rejected at the time. Take gambling: If you thought about taking the Patriots and laying the points, and the Patriots end up covering... it's easy to think, "I knew it!"

But you didn't.

Sure, you thought about it. Sure, it was an option you considered. But you didn't know.

Only now, in hindsight and after the fact, do you know.

As Mark Cuban says, "Life is half random. Being a billionaire requires a lot of luck, a lot of great timing."

Be willing to make the best decisions you can with what you know today. And don't beat yourself up if what you learn tomorrow causes you to rethink a decision.

Because you can't always know how things will turn out.

But you can choose to learn from every experience.

And to keep trying to make the bset decisions you can with what you know today.

Published on: Nov 22, 2019
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