Fantasy Baseball – Another Growth vs. Value Marketplace
Shortly after I began working at the Tacoma News Tribune (TNT) I was recruited into the fantasy baseball league that was comprised mostly of TNT sports staff and a few others. Twenty-plus years later, I’m still partners with Arnold Lytle and act as the GM of our team, the Designated Kidders.
In the fantasy baseball format, players are drafted (annual up-the-street, down-the-street), traded, or acquired as free agents. We track statistics in five hitting and five pitching categories. The best collective stats win the league.
Evaluating and managing baseball players in a fantasy league is a lot like distinguishing between growth and value stocks. Growth stocks are expected to have breakout futures. Their earnings should grow at a faster rate than the broad market. Their past history of performance, dividend payments, etc. is not as important as their future innovation and ability to dominate an industry. Value stocks generally have a deeper history. Some blue-chip companies have matured beyond their rapid growth period and settled into a more steady pattern of earnings growth, dividend payments and other factors of value. Some companies would not carry the steady, blue-chip label but fit as value stocks. They become value stocks because they have fallen out of favor with the market and investors’ perceptions of their future. Some have their stock price beaten down beyond justification and have the potential to be a great investment even if they never again become a great company simply because their share price is less than the company is worth. Remember that there is a difference between a good stock and a good company. A mediocre company trading at a very attractive sale price may be a better investment than a good company trading for a premium. At least until the point that the market realizes the mispricing of the stock and it returns to fair value, then it is likely no better future investment than paying a premium for a good company.
The characteristics and value of a stock are very similar to a baseball player’s fantasy league character and value. It’s tempting to reach for a potentially special player, drafting higher than is likely justifiable or giving up too much in trade to acquire. But if that player turns out to be Miguel Cabrera or Mike Trout, the speculative reach will have been well worth it.
Every fantasy team GM tries to sneak growth-oriented players, hot rookies or prospects who haven’t even played in the major yet, onto their roster before every other team.
While these players occasionally work out (I’m thankful for having had Cabrera turn into a superstar on the Kidders roster), the years that we have won the league championship have been because of unexpectedly strong performance from players taken later in the draft. These are the equivalent of good value picks by investment managers. Buy the unloved if you think it/they have a reasonable chance of recovering past glory.
When you take R.A. Dickey 200 players into the draft and he goes on to win 20 games, that’s a great value pick. Or when Carlos Beltran’s injuries cause people to pass on him and he returns to All-Star form in 2012, it usually has more impact on success than reaching for a potential breakout player in the first few rounds of the draft.
As with stocks, some players are growth performers for the first several years of their career and then become value picks. This is equivalent to Microsoft changing its character over time. It became impossible for Microsoft to grow at the same rate so it began paying its shareholders back with dividends instead of reinvesting all company profits back in research, development and acquisitions to grow the company.
Growth investing has its rewards, but comes with more volatility. A team of all growth players or growth assets may have higher highs and lower lows than more of a value-oriented approach. In many cases, it helps to buy with a margin of safety, a buffer so that even if the investment doesn’t rebound, you can’t lose much money on it. If purchased at a good price with a margin of safety, you don’t need many winners to equate to a good track record.
It’s certainly possible, however, to fall in love with your winners. You become willing to overpay for the past with hope for the future when the probability of continued exceptional outcomes is much less likely. It applies to stocks just as well as ballplayers.
Takeaway: Growth and value both have their merits. All things in moderation makes for good advice for investing and fantasy ball.
Investing and baseball (Part 1) – What do they have in common?
Investing and baseball (Part 2) – Tony Gwynn and Understanding Probability
Investing and baseball (Part 3) – Statistical Analysis
Investing and baseball (Part 4) – Team building and investment portfolio
Investing and baseball (Part 5) – An insider’s perspective on the game
Investing and baseball (Part 6) – Ongoing re-evaluation and adaptation
Investing and baseball (Part 7) – Keeping scores can be a matter of perspective
Investing and baseball (Part 8) – The rarity of most valuable “players”
Investing and baseball (Part 9) – Fantasy baseball (growth vs value)
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