Hot stove profligacy

06Dec06

On a cold winter’s day there is nothing like discussing baseball. That is of course if your home team has enough cash to play in the overheated free agency market. This puts into question whether baseball has really learned the lessons from Billy Beane and the Moneyball thesis.

John Authers in the Financial Times has an extended profile of Billy Beane, general manager of the Oakland A’s.* Authers focuses on how Wall Street has become enamored of Beane and his investment-like approach to analyzing players and building a roster. As with many investment strategies Beane has been forced to change his approach as statistics like on-base percentage (OBP) have been embraced by the rest of the league.

Beane says on-base percentage (OBP) is now one of the best rewarded statistics on the free agent market. Last year Oakland ranked only 10th in the major leagues in on-base percentage. But this does not mean that Beane’s strategy has changed, or failed. Rather than always looking for patient hitters, his aim is to look for whatever abilities are under-priced by the market. “Basically, when everyone is zigging, we have to zag. We have to be contrarian on everything that’s in vogue,” he explains.

With the growing amount of statistics available to fans and management alike it is becoming important for teams to analyze their roster and potential acquisitions in many dimensions. The article notes that Beane is now focusing on defensive abilities in an attempt to get a step ahead of the crowd. Beane’s own personal investing strategy apparently mirrors his (general) management style.

As for his own investing, Beane says that he certainly tries to be a value investor. He is a follower of Warren Buffett and Charlie Munger, but he is not as successful as they are. But Buffett – who owns a minor league baseball team himself – would doubtless approve of what Beane is doing.

We are sure that if we asked Warren Buffett about recent free agent signings this off-season he would be shocked. Seth Mnookin in Slate.com chronicles the many excesses of general managers this winter. In light of this reversal from what had been a period of “rationality” in baseball, Mnookin posits three reasons for the change. They include: revenue sharing, the mirage of parity, and the baseball echo chamber.

In trying to answer this question Mnookin makes a point that sounds an awful lot like portfolio management advice.

You could argue—as many baseball executives have—that the game’s cash surplus gives teams no choice but to overpay for the available talent. But all the money in the world doesn’t change the fact that there are only 25 spots on a major league roster. An overpaid veteran with declining skills and a long-term contract often blocks a future star coming up through the ranks.

General managers are in a very important way portfolio managers. Those that spend big dollars on seemingly proven talent have to balance not only the financial cost of these contracts, but also the degree to which these unmovable contracts will down the road eventually become a drain.

A diversified baseball roster with a good mix of young and experienced players that can excel in multiple facets of the game seems an awful lot like a well-constructed financial portfolio. In either case portfolio diversification is an important tool in trying to ride out the many ups and downs of a long baseball season.

Speaking of long seasons, our team the Chicago Cubs have been among the most active in the free-agency derby signing Alfonso Soriano to an 8 year/$136 million dollar contract. Does this make any sense in light of the rumors that the team might be sold? We didn’t think so either. At least waiting ’till next year will at least be a bit more exciting at Wrigley Field this summer.

*Thanks to Skip Sauer at the Sports Economist for the link to the Billy Beane article.

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