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Why the Olympics Would be a Terrible Stock Idea

A quick summary of the Olympics “net earnings” should tell you everything

 

The 2020 Summer Olympics kicked off on July 23rd and will end on August 8th. Tokyo will play host to over 200 countries at 42 venues across Japan – where over 11,000 athletes will be competing for Olympic glory across 42 sports.

As I’m sure you’ve noticed, many of the news stories about this summer’s Olympics have been negative. Tokyo setting a record for COVID-19 cases on just the fifth day and internet trolls suggesting that the big flying drone globe at the Opening Ceremony looked like the coronavirus. And in the days and months leading up to the Olympics, the noise to cancel or postpone grew louder. Worse, according to a report from the New York Times, nearly half of Americans surveyed believe the Olympics should have been cancelled or postponed because of COVID-19 – and that number reached 83% for those living in Japan.

The Costs to Host the Olympics

But that’s not what I want to think about right now. Instead, I want to think about the business of the Olympics. More specifically, I want to address this question: if it were possible to invest in a stock that was directly correlated to the success (or not) of the Olympics, would it be a good investment? Here are some thoughts.

First, here are the estimated costs of the last few Olympics, and the projected cost of the games in Tokyo.

  • Sydney 2000: $4.7 billion
  • Athens 2004: $10 billion
  • Beijing 2008: $42 billion
  • London 2012: $11 billion
  • Rio de Janeiro 2016: $11.2 billion 
  • Tokyo 2020: Projected to be over $15 billion

 Notice how the cost to the host city peaked dramatically in 2008? What else happened in 2008? Oh, yea, we had a global financial crisis…

Pay Attention to Net Earnings

Now, most economists would agree that cities that host the Olympics rarely, if ever, break even. And in Rio’s case, it was pretty ugly. According to Andrew Zimbalist – a sports economist at Smith College whose book, “Circus Maximus,” examined the economic consequences of the Olympics and the World Cup – it was estimated that Rio received at most $4.5 billion in revenue. 

I’m not sure under what circumstances investing in a “company” that had expenses of more than $11 billion with revenues of $4.5 billion makes sense. But let’s see if that revenue number should be higher – because I know the expenses were probably understated.

Even with Wild Assumptions, It’s a Bad Idea

From my myopic perspective, I suspect host cities promote two things when they bid for the Olympics. The first is that there would be an increase in tourism and the second is that the infrastructure to be improved/built would have long lasting positive effects for the residents of the host city.

The Olympic Games, watched by millions on television all over the world, offer a city publicity that is almost unrivaled. In 2011, NBC agreed to a $4.4 billion contract with the International Olympic Committee – the group in charge of the Olympics – for the rights to air the Olympics through 2020. And in 2014, NBC agreed to a $7.8 billion extension that carries through the 2032 games. 

But besides the great publicity, how much does a host city make from this television arrangement? The answer is nothing. But for purposes of this exercise, let’s say the host city receives ALL of it – or roughly $2 billion (that’s about the revenues per game paid to the IOC by NBC). 

Let’s further analyze the benefits of tourism to a host city, but from a more simple approach. Imagine that every man, woman and child from the globe traveled to Rio in 2017 and spent $1 – now we’re up to about $7.5 billion in “revenues” to the host country.  And interestingly enough, studies had suggested that the summer Games in Rio might have generated $5-6 billion in total revenue, so that’s not far off from our assumption. 

But unfortunately, nearly half of that goes to the International Olympic Committee. And here is another thing to think about: a fair comparison of how much money is spent because of an increase in tourism requires some sort of estimate of how much would have been spent without them. And that’s enough to make your head spin. So let’s stick with $6 billion.

So, here is what we have: a company with expenses of $11 billion (on the low-end) and revenues of $8 billion (on the high-end). So that makes my conclusion as your financial advisor pretty straightforward: if you could invest in the Olympics in the same way you could buy stock, I’d tell you not to do it because it’s a terrible investment idea. But shorting the Olympics might be a great investment idea…

The Olympics: A Terrible Investment Idea

Nevertheless, the Olympic Games will go on for those attending or watching and hopefully it will be a magnificent show. But when the games end, the people of the host city and country will be left holding the proverbial bag. 


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