By Nick Gertsema
I love baseball. To me, it is one of the purest sports. It’s a team sport, yet each player is responsible for fulfilling a specific role on the team. It’s also one of the few sports where you can’t run away from your opponent. If you have a lead, you can’t run out the clock. You still have to get the other team out to win the game. That’s part of the drama.
I used to imagine the scenarios as a kid; Bottom of the ninth, bases loaded, full count, 1 run lead, I’m at the plate, and here comes the pitch…
The Business of Baseball
I am also fascinated by the business of baseball. In the mid-1970’s with the creation of free agency, Major League Baseball players were now free to offer their services to the highest bidder. This had a drastic impact on the game. Now, rather than teams being able to hold on to players based on the fact that their scouting departments found them or traded for them, teams had to compete to hire the best players. Teams had to change their business models to accommodate higher payrolls and to attract the best players.
The sport has changed astoundingly little in the 150 plus years it has been around. Only relatively recently has technology had a major impact on the game and the business of baseball. With teams now searching for a competitive advantage in signing the best free agents and getting the most bang for their buck, they had to turn to some sort of qualitative measures to analyze their prospects.
Hence, advanced analytics were born. The basic statistics were no longer good enough. It was no longer good enough to see how many home runs or RBIs a player accounted for, now teams want to know their hitters’ batting average on balls in play or on-base percentage plus slugging. Rather than just being focused on how low a pitcher’s earned run average is, teams want to know the pitcher’s expected field independent pitching.
Tech Changes the Game
In the past 20 years, teams have gone from overpaying for a select but popular skillset to trying to find out all the data they can to predict the kind of player they’ll have by the end of the contract.
One story this season is about one of the best relief pitchers on the market. He has had great traditional stats and has been a dominant closer the year. He wants a record contract, but teams have been hesitant to sign him to one.
That got me wondering: What are these teams looking at? With newer technology, teams are looking at criteria they never thought possible. With years of data to test and a giant sample size to pull from, teams had to be looking at something that gave them reason for concern.
As it turns out, their concerns were based on multiple factors that weren’t even on teams’ radars a decade ago. The simplest is the reliever’s age. He turned 30 and, given the sample size, there is an increased probability that the player will not be as good at the end of his deal as he is now.
There are also concerns about a slightly reduced average velocity of his fastball. There are other relievers on the market who project to have better fastballs that will cost far less in terms of money and number of years the teams will have to commit. The biggest detractor is that the spin rate of his fastball has decreased. Given their research, when a pitcher’s spin rate falls, so does his ability to get hitters to swing and miss. The fewer strikes the pitcher produces, the more likely that his appearances will get longer and he will give up more hits, thereby not making him worth the substantial financial risk.
The Game-Changer for Finance
Financial services are not exempt from this tidal wave of changes. Technology has transformed how we do business. At Gertsema Wealth Advisors, we have the ability to combine a number of factors that predict how a portfolio should behave given different market conditions with our financial Stress Test software.
Our instinct is often to go with what’s working now or the most popular picks. Unfortunately, what works now may not be what will work well in the future and could leave us in a position where we are stuck with a poor investment. Just like baseball teams are using technology and new information to make long-term decisions, we use our financial stress tests to help create our long-term portfolio plans. If we have the technology to help uncover potential risks, we’d be foolish not to use it. If we are able to uncover potential risks and don’t make any changes to try and combat those, we are even more foolish.
Have you had any advanced analytics done on your portfolio? If you were shown some of the risks that you were unknowingly taking now, would you make any changes? We’d love to help by running a financial stress test for you. The more you know about your investments, the better informed you can be to make financial decisions.