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Wednesday
Mar262014

2014 AL East Preview

 

AL East Preview

 

“We don’t really consider how lucky a (performer) is.  If (he’s) consistently outperforming, wouldn’t that luck transform to a skill at a certain point?”

-- Unnamed General Manager, Winter 2014

 

It’s quotes like this that launch 2,000 word articles on FanGraphs followed by 8 dozen snarky posts in the comments section.  It’s logic like this that leads to Brandon League getting a guaranteed $22.5 million contract after a string of 72 innings pitched in 2012, during which he gave up a home run on just 2.1% of the fly balls he allowed – 8% below league average and 11% below his career average (accumulated over 5 times as many innings, mind you.)  It’s Gary Matthews, Jr. getting a $50 million contract a year after hitting .343 on balls in play, with no increase in power.  That’s 43 percentage points above his career and the league’s average. 

Those contracts were disasters for their employers as the unsustainable luck which drove the player’s pre-contract performance reverted back to normal.  Yet, the GM quoted above apparently believes that if someone is lucky over an extended period of time, it’s not luck, it’s a skill.  Being lucky is a skill, is what he’s proposing, apparently susceptible to the coin flipper who gets 7 heads in a row, and then asks to be paid a premium before entering the team’s next head-flipping contest.

In this day-and-age of analytics and Big Data, with new-generation sportswriters like Bill Barnwell and Zach Lowe checking your logic, that type of thinking in the management suite gets ridiculed.  But you know what – Who cares?  I mean who is the GM really hurting?  The owner of the team is writing the checks so if capital gets misallocated, financially it only hurts the billionaire owner.  Emotionally it might hurt the fans, but it’s just a game – in the grand scheme of things, the flawed logic of our uninformed GM is merely comical.

Except, I haven’t been completely transparent with you.  The unnamed GM above does indeed oversee a nine-figure payroll, but he’s not in charge of a major sports team.  He’s the Fund Chairman of a $27 billion state pension fund.  When he misapplies capital due to logic flaws, it’s not fans or a billionaire owner who get hurt, it’s the hundreds of thousands of retirees to whom he has a fiduciary duty who suffer.

When this GM has sub-standard critical reasoning skills, it isn’t comical, it’s tragic.

Within the last month, I’ve spoken to two different classes of MBA candidates who have formed a sports analytics club at their university.  I tell them that their immersion in the world of sports analytics and particularly sabermetrics make them uniquely qualified to excel at whichever future employer they end up working.  Amazon or Netflix needs a data analyst to uncover customer trends?  Give me someone who’s gone through Pitchf/x data.  Nate Silver excelled at analyzing polling data because he’d solved much tougher data problems within the realm of baseball.

Nowhere is the critical overlap more applicable than in the field of asset management.  Voros McCracken’s discovery that pitchers could only control certain elements of an at bat’s outcome was a truly revolutionary advancement because, at the time, it was thought impossible to quantify the effect of defense on a pitcher’s results.  Today, it’s believed to be extremely difficult, if not impossible, to separate fund managers’ results, which come under influence from a variety of factors out of their control, from the underlying set of skills which produced the result.

To my eye, it’s exactly the same problem and if it can be solved in baseball it can be solved in the field of asset management, where a lot more is at stake than figuring out if the Yankees payroll of $200million is efficient.  Why?  Because the state I’ve referenced above with the $27 billion pension fund is going to spend annually, at a minimum, $540 million (2% management fee, with no consideration of incentive fees) constructing its roster of money managers.  And the state we’re talking about falls right about in the middle-of-the-pack in terms of state population.  So you can roughly multiply the wages paid by 50x to get a scope of what's at stake -- and states represent just a sliver of all institutional investors.

That’s why, in conjunction with my employer, Novus Partners, I am working to develop a metric that measures skills and not results.  Baseball has WAR; I’ve created a single value to identify the value to a potential client (a state pension, university endowment, etc.) of the skills that active managers display while investing.  In other words, how much should anyone pay an asset manager for the Worth of their Actively-Generated, Exhibited Skills?  Or WAGEs.

Brian Kenny, of the MLB Network, is probably the most sabermetric-minded national analyst across the broadcasting landscape.  For more than a year, he’s waged a campaign to Kill the Win, complete with a Twitter-friendly hashtag (#KillTheWin).  I want to Kill the Track Record in asset management, or at the very least diminish its importance.  Like the ‘win’ statistic in baseball, the 1-, 3-, and 5-year track record is replete with factors affecting its value that fall entirely outside the control of the manager it’s trying to evaluate.  I’ll give you an example.

In the largest case study I’ve done, I’ve found a manager who trails the S&P 500 on a 1-, 3-, 5-year, and Inception-to-Date basis.  Virtually any investor looking at that track record would reject the manager as someone who could not create value for the investor.  If we had a fantasy draft, I could pick up this manager in the last round for no cost, and would do so gleefully.  An outsider would think I was insane but the truth is our manager should have gone in the upper rounds.  Why? Because his skill set is obscured by factors he has no control of (like the pitcher who gets no run support or is saddled with a shaky defense in the field) or by his attempting tasks he’s not skilled at (the plodding slugger who constantly tries to steal bases, or big men shooting 3s in the NBA).  I would very confidently outbid my competition for his services, assign that manager a role that he he’s perfectly suited for, and be in an optimal position to outperform my competitors.  Exactly the way today’s forward-thinking GMs operate.  WAGEs, not a track record, uncovers those skills.

Michael Mauboussin, author of The Success Equation, would call this exercise “detangling skill from luck” and he’s devoted an entire field of study to the need to focus on skills, not results, in a wide range of endeavors.  Led by the initial work conducted by baseball researchers, fans across all sports ridicule management that doesn’t embrace this advanced thinking to at least some degree.  To me, it’s a shame that sports franchises have widely embraced data-driven critical reasoning that benefits its fans while the financial industry is using the same metrics it’s used for decades.  Compared to today’s team previews on Grantland, Baseball Prospectus, or FanGraphs, a Sporting News season preview from your childhood is primitive. Yet, Morningstar is using the same track record-based, 1-to-5 star system to rate money managers that it used in the 1980s. 

And it is a shame, because the constituents who would benefit in the financial industry aren’t fans; they’re the endowments of the Mayo Clinic and Sloan Kettering, or one of hundreds of universities educating our next generation of students, or the retirees in a pension fund, or a sovereign wealth fund charged with ensuring the prosperity of its citizens. Voros McCracken cracked the code in baseball and it changed the way pitchers are evaluated and compensated, and the way rosters are constructed, but there’s a lot more at stake in the financial industry than a shiny trophy.

If you’re with a hedge fund or a mutual fund, or some other corner of the financial industry, drop me a note (see below) and let’s talk about this some more.  We need WAGEs to enlighten our industry’s general managers.

 

Tampa Bay Rays

Yesterday, in these pages, the Washington Nationals were revealed to be the projected 2014 World Series Champions.  So, let’s not bury the lead in the American League.  I foresee the Tampa Bay Rays winning the AL pennant. 

Ask a casual fan who the most consistently excellent team over the last four years has been and I suspect it might be a while until you heard the right answer.  Candidates such as the Red Sox, Yankees, Tigers, Rangers, Giants or Cardinals might surface, and while it’s true those half-dozen teams have accounted for the last four World Series titles and all eight pennants, the Tampa Bay Rays and the Rangers are the only team that have won 90 or more games each year since 2010. In fact, stretch it back six years and the Rays have averaged just under 92 wins a year.  That’s a remarkable stretch of elite play, but the success of the last four years has been obscured, just like the A’s a decade earlier, by Tampa’s failure to win a single playoff series.

That doesn’t effect this year’s regular season however, as Tampa once again will put 90+ win talent on the field.  In fact, thanks to a somewhat surprising decision to ‘stand pat’ in the face of a looming payroll squeeze, I think it’s the best team the Rays have fielded of the lot.  David Price, Tampa’s ace and former Cy Young Award winner is under his 7th and second to last year of team control. Arbitration eligible for the last couple of years, Price has signed a series of one-year contracts including a $14 million deal for 2014 this winter.  $14 million may be significantly below market-value for a pitcher with Price’s skills (Clayton Kershaw just signed for more than $30 million a year, over seven years, although he is three years younger than Price) but $14 million represents about 20% of Tampa Bay’s 2014 payroll.  As such, two-years of arbitration-eligible Price was a very logical trade chit for Tampa to use to acquire a haul of cheap prospects in return.  (Think James Shields for Wil Myers a year earlier, only better.)

The Rays didn’t trade Price though and as a result, they have the best rotation in the American League outside of Detroit.  It’s filled with high-upside mid-twentysomethings and, as always, it’s backed by the league’s best defense.  Here’s a cool comparison of the power of defense comparing the Rays pitching staff with the AL’s best in 2013, the Tigers.

                  Balls in Play       Runners              DPs                 Baserunner Kills

Tigers              4,059               1,277               135                              56

Rays                4,086               1,192               147                              58

The Rays staff allowed 27 more balls hit into the field of play, but allowed 85 less runners, and even though there were fewer runners, they erased 14 more of them once they got on base.  Put it into a formula and you see that the Rays defense was worth 52 runs or about 5.5 wins more than the Tigers.  5.5 wins is more than the difference, per FanGraphs WAR, between Max Scherzer (6.4 WAR) in 2013 and Jeremy Hellickson (1.4 WAR).  In other words, comparing their staff to the Tigers, Tampa’s defense prowess is more than enough, holding all else equal, to make their worst starter as good as the 2013 AL Cy Young Award Winner.  It also explains why I have Tampa, and not Detroit, leading the league in runs allowed in 2014.

In addition, I love the lineup construction of the balanced offense, and wouldn’t be at all surprised to see (attention fantasy players) Wil Myers push Evan Longoria for offensive MVP.

The Rays consistence of regular season excellence is not lost on the oddsmakers who have set a total wins market of 88 ½.  I project them to win more, but there are better plays on the menu. 

 

2014 Outlook: 

90-72 – First in AL East

713 Runs Scored       627 Runs Allowed

 

Boston Red Sox

In looking at last year’s team previews I was pretty shocked to read the following conclusion at the end of the Red Sox essay:

“There is a path to the playoffs for the Red Sox (it involves a lot of runs scored and competent performances from all five members of the starting rotation) and I don’t think it’s that far-fetched. But you should be getting paid a much better price to back that position.”

All through the piece I wrote how the Red Sox had 800 runs-scored potential and sure enough that’s exactly what they did, easily leading the majors with 853 runs scored.  Further, they more than overcame my starting pitching caveat, posting a 3.84 ERA, 4th best in the American League.  The other secret sauce? The bullpen went from being anchored by Alfredo Aceves (2-10, 5.36 ERA and 8 blown saves) in 2012 to Koji UeHERO (4-1, 1.90 ERA and 3 blown saves) last year.  Improving a bullpen is the easiest way to make the dramatic leap in the standings from one year to the next that Boston did last year.  (I’m looking at you, Seattle.)

The point is, the Red Sox didn’t come out of nowhere and they aren’t going to disappear this year, although some regression from a squad that won 97 games and needs to replace Jacoby Ellsbury and very productive departed pieces at shortstop and catcher is highly probable.

Oddsmakers had a good read on Boston not just in the preseason but all through the year – no one made money blindly betting on Boston, even early in the year, thanks to inflated lines.  I think that’s the case again this year.  The Red Sox are equipped to battle the Rays all season for the division and comfortably grab a Wild Card spot if they fall short, but with an over/under market of 87 ½ games, there’s no value in chasing that scenario.

 

2014 Outlook: 

87-75 – Second in AL East

751 Runs Scored       689 Runs Allowed

 

Toronto Blue Jays

Toronto may not have deserved the hype that accompanied them north, post-Spring Training, after their splashy acquisitions of a reigning Cy Young Award winner in R.J. Dickey and a consistent all-star in Jose Reyes, but neither were they really a 74-win team either.  They may have finished in last place for the first time since 2004 (first time in a decade?  That surprised me, frankly) but poor health cost the team a lot of production last year, and I think, with much more muted expectations, better things are in store in 2014.

This may be the one year the window is open for this roster because with the exception of Brett Lawrie, all of the needed contributions on offense will come from players who are over 30 now (Reyes, Encarnacion, Bautista) or who will be 30 by season’s end (Melky Cabrera).  The lineup is solid enough to produce more than 750 runs as long as they don’t have to give 18 different players at least 100 plate appearances like they did last year. 

Almost certainly though, pitching will prevent Toronto from maintaining any sort of meaningful differential between runs scored and runs allowed – a requirement to project an over .500 finish.

There is more upside here than there is perhaps at some with some other teams pegged to finish somewhere around the .500 level, but Toronto’s market of 79 ½ strikes me as pretty fair.  Pass. 

 

2014 Outlook: 

80-82 – Third in AL East

721 Runs Scored       735 Runs Allowed

 

Baltimore Orioles

Widely regarded a year ago as the luckiest team to ever win 93 games in a season and the least-qualified of all the 2012 playoff entrants, the Baltimore Orioles regressed 8 games last year to 85 wins and missed the playoffs.  So, last year karma paid the Orioles back for their good luck in 2012 right?

Not exactly.  Famed stock analyst Gordon Gekko might take a look at the 2013 Orioles, compare the data to the 2012 squad and say, “not bad for a quant but it’s a dog with different fleas.”  You see, while the Orioles got lucky in 2012 in terms of how their runs scored and allowed translated into wins, in 2013 they got lucky in terms of the actual runs they scored and allowed. 

In other words, in 2012 Baltimore outscored its opponents by 7 runs, a differential that is expected to result in 82 wins. (Per Bill James Pythagorean Theorem.) Last year, there was no such Pythag Luck.  The O’s outscored their opponents by 36 runs, which leads to an expected win total of 85 games, exactly what they won.  The trouble is, the Orioles underlying stats suggests they were lucky, by a wide margin, to have scored and allowed the run totals that they posted.  In 2012 it was Pythag luck; in 2013 it was cluster luck.  After I normalize for cluster luck the Orioles runs scored/allowed goes from 745/709 to 727/742 and an expected win total of 79 wins.

Starting from that benchmark, the loss of Manny Machado for at least a month is quite damaging considering he was the second most valuable everyday player for Baltimore last year.  His September knee injury was gruesome and while advances in surgical techniques have progressed to  such incredible lengths that Machado won’t just be back this year, he may only miss a month.  Still, one must wonder if it will take more than a season to get back to 6.0 WAR production.  The lineup has some nice pieces, especially if Matt Wieters would finally take ‘the leap’ at age 27, but the starting rotation is even messier than the Blue Jays and that should hamper any effort to get in the playoff chase.

 

2014 Outlook: 

79-83 – Tied-Fourth in AL East

697 Runs Scored       714 Runs Allowed

 

New York Yankees

Previously, covered in the opening piece of the year.

 

2014 Outlook: 

79-83 – Tied-Fourth in AL East

699 Runs Scored       721 Runs Allowed

 

Mop Up Duty:

Joe Peta is the author of Trading Bases, A Story About Wall Street, Gambling, and Baseball*  (*) Not necessarily in that order, a Dutton Books/Penguin (U.S.A.) publication currently available wherever books are sold.  Here are three on-line booksellers you can currently choose from:

http://www.amazon.com/Trading-Bases-Gambling-Baseball-Necessarily/dp/0525953647/

http://www.barnesandnoble.com/w/trading-bases-joe-peta/1111308063?ean=9780525953647

http://www.indiebound.org/book/9780525953647

He is also the author of Trading Bases, the Newsletter, a companion piece to the book.  If you have been forwarded this issue and would like to be placed on the mailing list, please send an e-mail to tradingbases@gmail.com

All newsletter archives are located at http://tradingbases.squarespace.com

You can follow me on Twitter here:  @MagicRatSF

If you want to be taken off the e-mail list, please let me know at tradingbases@gmail.com

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Reader Comments (2)

The stuff you are doing with WAGEs sounds interesting and it's really surprising that the financial industry is so far behind in that regard. I hope your quest to "kill the track record" pays off.

Also, I hope you're right about sabermetric knowledge transferring to the business world. As a current MBA candidate myself, I need to learn how to sell these skills to a potential employer!

March 27, 2014 | Unregistered CommenterZach

Enjoyed listening to you on 620 am radio in Tampa today. I looked up your blog when I got home and enjoyed that, too. Good stuff. Let's hope the fans turn out for what I expect to be another great Rays season. Thanks for your insight.

March 27, 2014 | Unregistered CommenterJim Lamb

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