Monday, September 03, 2012

Dollar-Cost Averaging, A Theory of Baseball Rosters and Cranky Cousin Jim

My cousin Jim and I have had a great back-and-forth over e-mail over the past five years, enjoying each other's company and focusing solely on the fate of our hometown Philadelphia Phillies.  We got drunk (figuratively) on their success in 2008, frustrated with the supernova-like rise and fall of Raul Ibanez in 2009 (that Brad Lidge perhaps eclipsed with a flameout that outdid his superlative performance in '08), the addition of Cliff Lee, the trade of Cliff Lee, the signing of Placido Polanco, the long-term deal for Ryan Howard, the trade for Roy Halladay, the depletion of the farm system, letting Jayson Werth go in free agency and the overall decline of the team from its peak in '08 until now.

Among the topics we discussed have been the decline of the bats since the Mets discovered that bullpen coach Mick Billmyer was spying on hitters, whether certain players were on steroids, whether the prospects who were traded were any good, why they traded Lee in the first place, why they signed Ibanez and Polanco, why they signed Howard to the long-term deal when they did and a whole host of other issues.  When you review the performance of the team, you realize that they have declined each year since 2008.

2008:  World Champions.
2009:  Lose in the World Series to the Yankees.
2010:  Survive major injuries, lose in NLCS to Giants (and Pat Burrell, who won a second WS ring before either Cliff Lee or Roy Halladay won their first).
2011:  Lose in NLDS to Cardinals.
2012:  Barring a major miracle, will not make the playoffs.

In short, their performance has diminished with each succeeding year.  Now, had a) Brad Lidge had a halfway decent year in 2009, had each member of the Giants' pitching staff not turned into Sandy Koufax in the post-season and had the team not stopped hitting in '10, had Cliff Lee and his megamillions been able to hold a 4-0 lead after one inning in game 2 of the NLDS, well. . . perhaps the hometown nine might have managed one additional World Series victory (as asking them to have won four in a  row is just way too much).

That said, though, over a lengthy back-and-forth, cranky Cousin Jim has focused on what he perceives to be bad individual decisions by GM Ruben Amaro, while I have focused on the overall theory behind the decisions.  We both agree that Amaro is bold, but we summon a comment my father once made (as told to him by a friend who was a retired Air Force general):  "There are old pilots, and there are bold pilots, but there is no such thing as an old, bold pilot."  Neither of us quarrel with Amaro's decisiveness in going to get what he wants.  It's just that crusty Cousin Jim doesn't like some of the wants (for example, when they inked Cliff Lee, he wondered why they would go long term on a pitcher without a real "out" pitch whom the Indians had left off their post-season roster in 2007).  We also both wondered why the Phillies would invest so much in pitching in the post-steroids era, where bats seemingly are increasingly hard to find (witness that home run numbers are way down).

My big issue centers upon my focus on two theories -- demographics and what happens to players when they age (they are more injury prone, they can get heavier, and family matters can distract them) and a concept that you cannot have $10 million players who are the same age at each position and expect that model to be sustainable without hitting a plateau and fizzling.  Both Cousin Jim and I agree that long-term deals are toxic, as outside Derek Jeter, most players will outlive their usefulness after the first couple of years (and it's hard for any person to stay hungry when the money is guaranteed and they get to buy the Maybach for their summer and winter homes regardless of whether their OBP is .297 or .374).  The Mets learned this lesson with, among others, Tom Glavine and Billy Wagner, the Yankees are learning it with A-Rod (who at 36 has six years to go on his deal), and the Angels and Tigers will learn this painful lesson with Albert Pujols and Prince Fielder respectfully.  Yet, many a GM thinks that he'll withstand the gravity pull towards long-term declines and opts to gamble on the "missing piece" that can help the team transcend.  Put simply, the Nats' honchos must rue the day they signed Jayson Werth to his seven-year, $126 million deal.

The demographics piece is easy.  The Phillies were healthy and motivated in 2008, on the way up, and they were relatively injury free (and fielded a pitching staff that was much less formidable then -- with Brett Myers as the #2 starter) than in subsequent years.  The core of the team -- Jimmy Rollins, Ryan Howard, Chase Utley, Shane Victorino, Werth -- all were in their late twenties, they were hungry, they were eager, and a few were without long-term deals (Howard, Victorino, Werth, and Utley and Rollins were, relatively speaking, bargains).  The problem that some of us foresaw was that they needed to establish some of the younger players in order to sustain their excellence, and we thought that in catcher Lou Marson, infielder Jason Donald and a few others (OF Michael Taylor, OF Domonic Brown) they would have some room to bring up younger players once either Howard or Werth left in free agency and the team figured out that Pat Burrell was almost done.

So, in 2009, instead of promoting a younger player or combing the free-agent market for a younger missing piece who could at least play some of the time in left, they opted for thirty-six year old Raul Ibanez at $11 million a year.  At the time, both Cousin Jim and I thought this was a bad decision.  The team got older, not younger, and, of course, all Ibanez did was go out and have a monster first half of the 2009 season that made him a fan favorite at the Bank.  But then a funny thing happened -- his performance fell through the floor, and in the last two and a half years of his deal he played a shaky left field and had an OBP below .300.  That's an OBP, not a batting average.  And he was expensive.

In 2010, the Phillies finally decided that after years of enduring David Bell, Abraham Nunez, Wes Helms, Greg Dobbs and Pedro Feliz at third base, they needed a bona fide third baseman.  So they inked free-agent infielder (as he had played a Gold Glove 2B in Detroit) Placido Polanco, then 34 and with a history of injuries, to a three-year, $24 million deal.  There was an irony and a problems with this.  The irony was that a few years early, in a quest to build their bullpen, they traded the same Polanco to Detroit for Ugueth Urbina, who right now languishes in a Venezuelan prison after being convicted of attempted murder.  The Polanco trade did make room for Chase Utley to play every day, though.  That said, once again the Phillies got older.  In fairness, Polanco's OBP was in stark contrast with that of Feliz (who had the worst OBP when the Phillies signed him as a free-agent, thereby exacerbating a team problem, which was at that time they had too many players who struck out too often and did not walk enough) and Ibanez.  The problem was that he couldn't stay healthy.

And neither could Rollins, Victorino, Howard and Utley in '09 through '12, particularly the latter three in '10 (where at one point the Phillies' lineup had Dane Sardinha, Wilson Valdez and Juan Castro hitting 6, 7 and 8).  Utley's injuries are well-chronicled, but Rollins and Victorino had leg problems during those periods too.  A testament to the team's grit and leadership, in fairness, was how well the team fared amidst all the injuries.  There is some merit into having a veteran team -- they know what it takes to win and they did what it took to keep the team together when injuries beset it.

But the injuries did come, the team showed its age, and gradually went on its slide.  In fairness, most fans still would settle for the 2008-2011 years of the Phillies, even if at times the team under-delivered given its talent and potential -- the park was packed, the team exciting, and the performances very good.  Who could forget Roy Halladay's perfect game in Miami or his no-hitter in the NLDS against the Reds, among many other memorable moments?  Let's be clear -- it was a great run and it was fun to watch.

It's probably too much to ask for your team to sustain excellence year after year.  The Yankees can do it because they have so much money and can eat mistakes the way no other team can.  But problems exist when the team ages, when the team has a lot of long-term contracts (see Phillies, Red Sox and perhaps now the Dodgers, who didn't learn much from the first two) and farm systems aren't chock full of up-and-comers.  Atop that, scouting is still a woefully inexact science (witness that twenty or so teams passed on the Angels' Mike Trout in the draft a few years ago, presumably because he is from New Jersey), among other blunders.  Now, some genius will figure out some way to select and develop players in a matter that much more accurately predicts success, but even if the process remains disappointingly inexact, there is still a way to avoid the "everyone got old at once" problem (Branch Rickey figured it out decades ago, and somehow the theory fell by the wayside).  Long-term deals will remain an issue under the current structure, and there is no way to protect teams against themselves, but at some point if teams have a decent enough pipeline and remember not to get too old at once, they'll have a chance to sustain excellence over longer periods of time.

Okay, so I just introduced a bunch of variables -- the need for more accurate recruitment and development and a need to avoid long-term deals (goodbye, Barry Zito and Vernon Wells, who somehow should go down in baseball history the way the Edsel has in the manufacture of automobiles), and we can put them in the parking lot for now.  The key theory that I would like to describe is to apply the investment theory of dollar-cost averaging to how to run a team's roster.

Dollar-cost averaging is something that Vanguard advocates as does Burton Malkiel, professor emeritus of economics at Princeton.  Basically, you are instructed never to time the stock market, but to a) invest in low-cost index funds by putting the same amount each month into them and b) to reinvest the dividends.  Malkiel proved that over time this was the best way to get the best performance out of one's portfolio (as opposed to timing the market).  (I recall a conversation with a relative about Berkshire Hathaway in 1986; she had $5,000 to invest in an IRA, and I suggest buying 5 shares at $1,000 apiece.  The response was "Well, it's expensive, I'll wait until it does down."  I haven't checked the share price recently, but at one point a single share went for over $120,000 in the past three years).  Look, we all can miss out on things like that, but the point is that if you invest constantly and similarly, you will do reasonably well.  Most recently, in a way, the Phillies timed the market by having a portfolio of investments that all came due at the same time.  Put different, they bet long on the entire core when they should have hedged, shorted or sold some of it and rebalanced the portfolio.  Again, I'm not an investment expert, so perhaps I'm mixing concepts, but at the end of the day, you want to keep rebalancing your portfolio.

It's easy to say that when you're not in the GM's shoes and you have the benefit of hindsight.  But it's clear to most fans that at a time when they needed to get younger and healthier, the Phillies inexplicably got older.  They went for the labels of performers whose best days were behind them, instead of facing the reality of aging players with declining skills.  They should have worked hard a) to lower their average age and b) to sign some starters whose salaries were closer to the Major League minimum and who weren't eligible for arbitration for a while (or who were simply lower-cost players) than to sign more expensive ones.  Yes, they inked Lidge to a three-year, $36 million deal in the middle of '08, when he was very hot, and that deal turned out disastrously, too.  That type of mistake each team can tolerate occasionally, but the signings of Ibanez and Polanco represented an errant philosophy.  And while we can debate whether signing both Lee and Halladay to long-term deals was wise, we cannot debate that both guys were well past 30 when they signed them.  That the Phillies had the oldest starting lineup in the Majors going into this year (according to Baseball Prospectus) was no accident.  That they are performing accordingly likewise is no surprise.

Cousin Jim and I are frustrated.  Very grateful for what we watched, but frustrated with what could have been, frustrated with the decline in the bats post-binoculars, and frustrated overall with occasional positive tests for steroids that continue to stain the game.  We're frustrated with poor performances under long-term contracts, and we're frustrated with decisions that we thought were bad at the time, that we were powerless to change, and that are showing the poor results we predicted.  That's not to say that ownership shouldn't be applauded for spending more than they ever have or that they are not well-intentioned.  It's just to say that they need to spend more time on planning and a theory for long-term sustainability that transcends throwing money at problems and long-term deals.  They need to examine baseball history, they need to plan, and they need to develop players (they haven't developed a star position player in about 10 years, since Chase Utley joined the team -- that's a long time).

So, as the Phillies' brass re-groups after a disastrous season -- poor performances from starting pitchers, an awful bullpen, a poor attitude at times from Jimmy Rollins and apparent dishonesty from Chase Utley as to his physical condition -- they need to did a little more deeply, come up with a longer-term game plan and stick to it.  In a way, it's a high-class problem, but it's a critical time to do something differently.  The temptation will be there to spend greatly on aging stars to try to eke out another Series victory, but the price could be very great -- a failure to spend on the farm system, poor drafting decisions, and a continued aging of the roster that will cause more future lean years than fewer.

It's time to dollar-cost average, balance the portfolio, and develop younger players.

Before we return to the days of having right fielder Glenn Wilson imitate Rambo in the team's ads and having the team's president lament the team's fate because it's a small-market team.

Been there.  Done that.

It isn't pretty.