That’s right, I’m going to compare the stock market to fantasy baseball. In a week pitchers and catchers will report to spring training, which signifies the beginning of the baseball season. The beginning of the baseball season means it’s time for fantasy baseball. Over the past week I’ve been reading up on mock drafts, sleepers and potential late round closers. As I was doing this, I realized that fantasy baseball is very similar to the stock market.
Buy Low, Sell High
One way to “win” at the stock market is to buy stocks when the value is low and sell stocks when the value is high. Trading for players when they’re about to get hot and trading away players when they’re about to slump is a sure fire way to win your fantasy baseball league. Unfortunately, this task is just as hard in fantasy baseball as it is in the stock market.
For example, if I were to trade for Manny Ramirez right before he was traded to the Dodgers and went CRAZY, I would have been buying low. If I had traded away Edinson Volquez at the All-Start break, because I thought Dusty Baker had abused his starting pitcher (what else is new?) early in the season, I would have been selling high.
Another method of beating the stock market is through market timing. Often investors try to dump cash into the stock market when they think the market is in a valley and sell stock positions when the market is at a peak. In fantasy baseball this is the equivalent of trying to bench a player before he slumps and insert a slumping player into the starting lineup hoping that he gets hot.
The problem with this strategy is that you can never time the valleys or peaks just right and you end up missing out on the days with the largest market gains and are still invested on the days with the largest market losses.
For example, over the past few seasons, Carlos Zambrano has been an unusually streaky player. He is capable of going 2 straight months with an ERA around 1.00 and then following it up by getting lit up for an entire month. By the time you bench him until he gets everything straightened out, Big Z has already turned things around. Since you won’t start him until he has a good outing or two, you end up starting him for most of the slump and miss his first couple of good outings.
Future Performance, not Past Performance
Fantasy baseball and the stock market are perfect comparisons with regards to using the past to predict future performance. You spend so much time researching the past performance of a stock or a baseball player to help you predict the future performance. The problem with this strategy is that you get no benefit from past performance, you only benefit from the future performance. Your best bet is to look at which stocks/players are producing well below their expected value and acquire them.
Just like in the stock market, there are cheaters in baseball and fantasy baseball. For every Enron, there is a matching Barry Bonds or Roger Clemens in baseball. Where there is money to be made, you will most likely find people trying to cheat. In fantasy baseball, I routinely get trade offers from people who are trying to trade someone who had just hurt himself hoping that I didn’t know. I don’t like cheaters or people who misremember.
Rookies are incredibly unpredictable, just like IPO’s. There are rookies who burst onto the scene with great expectations and completely fulfill those expectations like Evan Longoria and Ryan Braun.
There are also those rookies who are high draft picks out of high school only to languish in the minors. Some of these players finally emerge like Josh Hamilton. He was drafted with the first overall pick by the Tampa Bay Rays, but struggled with drug addictions. In his second full season after breaking his addiction to drugs, Hamilton belted 33 HRs and drove in 130 runs (not to mention his home run derby performance).
Another class of players, known as quadruple-A players, dominate the minor leagues at every level, but just can’t put it together in the majors. A few recent examples are Homer Bailey of the Reds and Felix Pie of the Orioles (formerly of the Cubs).
In fantasy baseball I stay away from rookies for the most part. I might take a flier on a promising player, but I will never go all in on a rookie. This is great advice for investing in IPOs as well.
Just like with investing, in fantasy baseball I like to draft somebody who can be a rock in the middle of my lineup. Somebody who you know exactly what you’re going to get on a year to year basis. The best example of this is Albert Pujols. Even last year when he was supposed to have a down year due to injury problems, he homered 37 times and hit for a .357 average. An all-US stock market index fund can be that rock to carry your portfolio towards financial independence.
Overvalued and Undervalued
In fantasy baseball and the stock market there are overvalued and undervalued players and stocks. Overvalued stocks will kill your portfolio and overvalued fantasy players will kill your team. Every year you have to spend a pretty high draft pick to nab Derek Jeter. He isn’t a terrible baseball player, but at this point in his career, he won’t steal you 30 bases and he’ll barely hit 10 balls out of the park.
If there are overvalued stocks and players, there must be undervalued stocks and players. These players, when drafted in the later rounds, will win you your fantasy league. Every year Mike Cameron is undervalued. He’s routinely selected towards the end of the draft and finds himself on the waiver wire a few times throughout the season. If you look up his stats at the end of the season, he always threatens to join the 25/25 club for HRs and steals.
I hope that I’ve managed to convince you that the stock market and fantasy baseball are very similar. I have two pieces of advice to offer with regards to the stock market and fantasy baseball. First, to succeed at both you have to research the trends of the long-term past, not the recent past. You will not win at either by chasing recent past performance. Second, to win at both you have to get a bit lucky. You can do everything right in order to win, but lose because somebody else picked up Carlos Quentin or Evan Longoria before you.
Do any of you play fantasy baseball? If so, what are you strategies for winning your leagues?
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