I think I’m one of only about 12 hardcore baseball fans in Canada. Krystal joins me as a fan, meaning there are only 10 more people in the entire country that would rather watch the Blue Jays than the Maple Leafs. Another one of those guys is my buddy, who is a little obsessed with the sport that unfolds at its own leisurely pace.
For me, one of the ways to get more out of the baseball season is to play fantasy baseball. I’m currently in two leagues, leading one (out of 20 teams, go me!) and I’m in 16th in the other one (also out of 20 teams, boo me!). I’m hoping that I can hold on to this lead, but I’m not optimistic.
While looking at players on the scrap heap last night, I started to think about how fantasy baseball can be a lot like investing. Different fantasy owners have different strategies for their teams, just like different investors have different strategies. Like in investing, it’s not always the well known sexy names that determine the outcome of the league, rather it’s the guys picked near the end of the draft that do much better than expected.
Let’s take a look at the five different categories of players/investments, with a few examples of each. This post will probably not help you be a better investor or fantasy baseball player, but you should still stay and read it all. If not, I might cry.
Fantasy Baseball: Albert Pujols, Roy Halladay, Hanley Ramirez, Ryan Braun
Investing: Google, Apple, Wal-Mart, Coca Cola
These are the players and companies that are just about slam dunks. The players are the best of the best, often leading the league in their individual categories. Albert Pujols might end up being the best hitter of all time. Roy Halladay is the best pitcher in the National League, and might even be the best in the whole MLB. Even lesser known stars like Ramirez or Braun are great performers, they just don’t quite get the attention as some of the others because they play in places where the mainstream press often overlook.
Like the players, companies in this category are the best of the best. Their products are head and shoulders above their competition. You won’t find anybody with a bad thing to say about them, and rightfully so. They consistently deliver great results to investors. When the market sells off, these companies will always outperform the market. Investors normally flock to these stocks, which can sometimes cause them to get overvalued, but usually the stocks end up growing into their value.
The Slow And Steady Performers
Fantasy Baseball: Kevin Youkilis, Shin-Soo Choo, Adam Dunn, Jokim Soria
Investing: Reitmans, Roger’s Sugar, Kellogg, Microsoft
In baseball, these are the guys who aren’t quite as good as the stars, but are still pretty good baseball players. These players will put up decent stats for a fantasy team owner, all while doing it under the radar. A hardcore baseball fan can tell you why all these players are valuable, but for whatever reason, a lot of casual fans aren’t aware of how good these guys are.
As investments, these companies are usually in mature industries, and they don’t experience tons of growth. They make up for a lack of growth by paying generous dividends, as well as trading at lower P/E ratios and having solid balance sheets. These types of companies don’t have the sex appeal as the superstars, but are solid performers. Since they’re mature companies in mature industries, they don’t get as much attention as the newest sexy growth stock. Which brings us to category 3:
The Came Out of Nowhere Guy
Fantasy Baseball: Jose Bautista, Delmon Young, Alex Gonzalez, Brett Gardner
Investing: Amazon, Netflix, pretty much any gold company
These are the players and investments I try to avoid. The players are those guys who were mediocre players for years and then had a fantastic season last year. Some, like Jose Bautista, leveraged their one good season into a huge contract. Will these players repeat their performance? They might, but a fantasy owner will have to pay a huge premium to own them. For me, the track record isn’t long enough to pay a premium to own one of these guys.
It’s the same thing for the stocks listed. These companies may keep growing at an exceptional rate and justify their high multiples, or they might be a giant disappointment. For me, the downside is worse than the upside, so I stay away from them.
The Sexy Rookie
Fantasy Baseball: Buster Posey, Carlos Santana, Mike Stanton, Starlin Castro
Investing: Lululemon, Facebook, Twitter
These fantasy baseball players are the ones that everyone knows are coming and everyone knows will most likely be good. While there are some famous busts, most of these prospects turn out to be solid players, and a few become legitimate superstars.
These types of companies are similar. These companies have real revenue, real products and real business models. The market may overvalue them (just like fantasy owners may overvalue upcoming rookies) but there is reason to get excited about them, providing they can be picked up for a decent price.
The Beaten Up Guys
Fantasy Baseball: Adam Lind, Grady Sizemore, David Ortiz, Russell Martin
Investing: Revlon, Eastman Kodak, Nokia, Yellow Media
These are the players who used to be superstars, but for whatever reason (usually injuries) they are unloved by fantasy owners. Usually a player will have a couple of injury prone seasons to get a place in the doghouse like this. These players are usually starting players when they’re healthy, and can put up good seasons if they find a way to stay healthy for extended periods of time. These type of players usually offer a decent value, since they’ll slip down in the draft.
These types of companies are beaten down, and prospects don’t look very good. Like the baseball players, some will work out for an investor, while others will fail miserably. There will be some people who have a good track record picking these types of companies, but even they will have their share of dogs. It’s important to pick beaten down stocks in a portfolio, rather than just having one or two.
What Can This Teach You?
Each successful fantasy team owner simply cannot focus on one of these categories. There simply aren’t enough studs or slow and steady guys around. The difference between the winners of a league and the losers of a league are the guys in the other categories. How did their rookies perform? Did their scrap heap guys bounce back and have decent seasons? And if they picked a came out of nowhere guy, he probably performed well for a successful team.
As an investor, an easy way to gain access to every type of investment is to buy the index. The TSX Composite or S&P 500 have several stocks in each category. All an investor has to do is buy the index, and they have exposure to each different category. If the market goes down, the studs will protect the index from additional downside. If the market goes up, the beaten up companies will outperform, helping raise the index.
Or, if an investor chooses, they can attempt to pick the best from each category, attempting to build themselves an index of sorts in their own portfolio. This can be successful if the investor has the knowledge and experience to pick good stocks. Maybe most investors shouldn’t bother and just buy an index or three.