Weekend Diversions: The Yankees and Your Investments
The official numbers are out and the Yankees once again top the list for highest payroll in baseball at a whopping $209 million ($71 million more than the next highest team). The Yankees are Fiscally Irresponsible no doubt about it! Before I begin, let me take some time to announce that I will be selling the shirts pictured above if there is enough demand for them. Leave a comment here if you’d be interested in buying one.
So, why does this post belong on an investing website? Well, first because I like to publish a slightly tangential post on the weekends just so we’re not always fixated on the markets. After all, there’s more to life than investing your money. Second, because I feel like the Yankees are a prime example of how not to invest.
Baseball player contracts are investments. Since they are guaranteed, they are sort of like bonds that must be held to maturity with payback given in player performance. Young, up and coming players are like high-yield debt. They are higher risk but offer the chance at high return. To mitigate some of this risk, their contracts are only year-to-year. Veterans who hit the free agent market and get multi-year contracts are like longer term bonds with varying investment grades. The best of these only come with long-term contracts. A well balanced baseball payroll is much like a well-balanced bond ladder. You want a good complement of short-term and long-term contracts with varying expected returns so that you aren’t overly exposed to any one type of risk.
The $209 million payroll that the Yankees boast was created as a result of investing large sums of money into long term deals for older all-star players. This is akin to buying the bonds of high flying automakers despite headwinds of declining performance. There’s a good chance that they will keep providing steady and consistent returns, but because the deals are long term there’s some risk involved due to uncertainty in long term projections. By doing this, the Yankees were forced to pay premium prices and are facing some interesting problems as risks begin to manifest themselves. Jeter, Damon, and Giambi have begun to decline in the field. Abreu and Mussina have declined faster than expected. And, injuries have called into question Matsui’s ability to return on the $13 million invested in him. Unable to unload these investments when they underperform, they are forced to play players past their prime (Jason Giambi at first base, Johnny Damon in center field) or waste this investment by benching these players (Giambi, Damon, or Matsui could reasonably be benched on any given night) in order to give their growing investments a chance to perform (young players like Cabrera or Duncan).
So, what might a more balanced portfolio of baseball players look like? Well, take your pick of the Red Sox, Tigers, or Mets. These teams have each assembled a complement of blue chip players and young, high-potential players. A well-diversified portfolio, if you will. While on a position by position basis, it’s difficult to say that the players on each of these team will ever have overall careers as impressive as their counterparts on the Yankees, it would seem that these teams are more flexible in their off season pursuits, maintain similar overall expectations for team performance, and are at less risk to injury/age-related decline. Oh, the power of diversification.
Okay, was that investing analogy too much of a stretch for you? Let’s talk real baseball. With $209 million, you could field your choice of either the Red Sox ($133M), the Mets ($138M), or the Tigers ($138M) as well as both the Marlins ($21M) and the Rays ($43M) with money to spare. You’d be able to field a major league team that almost all to be consider equal to, if not, better than the Yankees and have two minor league teams which field the best shortstop in the league (Hanley Ramirez), two of the best young left-handers in the league (Scott Kazmir and Andrew Miller), one of the top outfielders in the league (Carl Crawford), and two young righties who project as top of the rotation starters (James Shields and Matt Garza).
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Full Disclosure: Some of you may know that I’m a Red Sox fan and before you start whining about how the Red Sox are “just as bad”, please do check the full list of payrolls in the link in the post.
You’ll find that the Red Sox are scheduled only to be paying $133 million for their major league team this year. That puts them at 4th in the rankings with both the Mets and the Tigers ahead of them at about $138 million. In fact, while the Red Sox were ahead of the curve in escalating their payroll, it would seem that the rest of the league has caught up very quickly. This year, 9 teams are paying above $110 million and 11 above $100 million.
I have to admit that I left out the fact that the Yankees have retooled the lower end of their “bond ladder” quite quickly with the additions of Chien Ming Wang, Joba Chamberlain, Ian Kennedy, Phil Hughes, and Robinson Cano. It’s possible that in a few years we’ll see the Yankees getting much better return on their investment in payroll. But, it will take them some time to clear some of the poor performers out of their books.