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Risk Management

I like to think about my fantasy team in much the same way that I would a portfolio of investments. The players that fill out your roster are much like stocks. Their market values can fluctuate greatly with peaks and valleys in their performance or changing circumstance. Aside from draft day in an auction league or a salary cap league, there will not be a literal price tag on that player that you covet but each player’s market value is determined by what you would need to give up (either via trade or waiver claim) to acquire said asset.

In the financial world, risk management plays a huge role in the decisions that savvy investors make. In theory, the riskier the asset, the greater the expected return needs to be in order for that investment to make sense. An expected annual return of 10% might look pretty good for a stock from a well established company with a track record of success. That same expected return would not be enough for a riskier investment in a company that either has a history of inconsistent performance or lacks the track record. Because investors are less certain of what they will get from a “risky” investment, they need a greater expected return in order to take the plunge.

The same concepts hold true for fantasy owners. The risks that you take on draft day and throughout the season need to be offset by potential for gain. Owners are usually willing to pay a premium for “safe players” like Robinson Cano, Adrian Beltre and Jay Bruce. There may be players drafted after these guys who have higher ceilings, but the steady performance over time from these guys offers a high probability of a repeat performance. Conversely, players with extensive injury history or guys lacking an established track record make for riskier investments on draft day.

How owners manage risk on their roster (both during the draft and throughout the season) goes a long way toward determining how consistently they will be successful. Owners who do a good job managing risk will likely find themselves near the top of the standings year in and year out. Those who do not may have winning seasons when the stars align, but they will not be able to achieve the desired result regularly.

Before we discuss the application of risk management strategies in fantasy baseball, we must go over two important assumptions.

Number 1: There is no such thing as a “risk free asset” in fantasy baseball.

In the financial world, a risk free asset is defined as: “an asset that has a certain future term. Treasury securities are considered to be risk free because they are backed by the US government” (www.investopedia.com).

There is some level of risk associated with every player. The nature of our business is that we try to use past performance to predict future results. Just because a player starts 160+ games and puts up elite numbers for five consecutive seasons, that does not guarantee fantasy owners of a sixth such season. Players who have proven to be durable in the past are certainly “safer” than players with extensive injury histories, but the injury bug and/or production decline can strike anybody. A couple years ago Albert Pujols was as safe as they come, and then all of a sudden he wasn’t. No player in our game comes without some level of risk.

Number 2: The risk that you take as an owner of an individual player is inversely related to the investment.

This point might seem like common sense to some, but it is an important one. Taking a big risk in the first round will have a significant impact on your team if the investment turns sour. If your 23rd round pick doesn’t pan out, then you simply drop and move on. It is really difficult (and unwise) to pull the plug on a player you have made a significant investment in if that player isn’t producing. When your third round pick goes down for two months, you can either trade him for pennies on the dollar or just ride it out.

The earlier you draft a player, or the more you give up via trade, the greater the investment. The more you invest in any one player, the greater your implied risk becomes. In other words, It is more difficult for owners to recover from a first round bust than it is to recover from a sixth round bust because of the opportunity lost in the form of other players passed over at that spot.

Finding a player’s true value on draft day

We know that no player comes without risk, but it is absolutely reasonable to pay a little extra for a player with a reliable track record. That does not mean you are going to draft a player like Jay Bruce in the first round, but you could make a strong case for him ahead of riskier assets like Bryce Harper and Matt Kemp.

Everyone will have their own ideas when it comes to player valuation, but owners cannot be blinded by upside when making investment decisions. Upside is important, but it must be weighed against the downside risk associated with the player to determine a player’s worth. Too often, owners get overly aggressive when reaching for the next breakout performer and they may draft a risky player at a point where their profit potential is minimal.

Here are three common types of risk that owners need to evaluate when making decisions:

Injury Risk

No player is impervious to injury, but some have extensive histories littered with DL stints. When evaluating players like Troy Tulowitzki and Matt Kemp, their history must be considered. Some players tend to get hurt more often than others. Some positions (pitchers, catchers, MIs) are subject to greater injury risk than others.

The best way to ensure that you don’t pay too much for an injury prone player is to avoid projecting them for a full season. Projecting a player like Tulo for 160 games is an unrealistic expectation. Tulo, however, has shown the ability to produce on an elite level whenever he is in the line-up. He might not give you more than 140 games, but they will be 140 games of elite production. I will discount Tulo by about half a round from where I would draft a more durable version of him.

Players like Matt Kemp provide a different dilemma entirely. Kemp has top of the first round upside, but his injuries have also affected his production on the field. The shoulder issues negatively impacted his power output last year and his hamstring issues have limited his speed game too. The range of possible outcomes for Kemp’s 2014 campaign literally run the gamut. There is a possibility that Kemp returns to elite status, but also a very real risk that Kemp’s run as a fantasy cornerstone is over. Don’t pay too much for his services.

Your league’s format may play a role in your evaluation of injury risks also. Losing an elite player for a few weeks might hurt more in a head to head league than it would in roto. Make sure you take this into consideration.

Lack of Track Record

Every year a new crop of elite prospects emerges from the minor leagues. Fantasy analysts tout their upside driving draft day costs up. Owners in search of the next Mike Trout breakout are often eager to pay a premium for the next big thing. The trouble is that minor league success and even big league success in small sample sizes are not always indicative of future results at the big league level. For every Trout or Puig success, there are multiple players like Brett Lawrie, Jason Heyward or Desmond Jennings who get drafted in the early to mid rounds and fail to meet our expectations.

Prospects playing their first full season in the bigs are obviously risky but so are players like Bryce Harper. Like most people, I am convinced that Harper will be a fantasy superstar at some point but the question is when. Harper has been far from elite in his first two seasons but the price tag remains very high because of our expectations.

Drafting Harper in the 2nd round means that you are expecting Harper to break out in a very big way. Paying the price for those expectations leaves your profit margin pretty thin even if your expectations end up being realized. Considering Harper’s history of somewhat average fantasy production, there is a lot of risk in drafting hyped up players like Harper before the anticipated breakout actually comes.

Out of Nowhere Breakouts

This category is also related to the player’s track record. Often you will see a player put together a monster year seemingly out of nowhere. Sometimes this increased production is due to a performance breakthrough and it is sustainable in future years (Jose Bautista). Other times, it is due to a flukey BABIP or HR/FB rate and that player comes crashing back to reality the following year (Chase Headley).

There was no shortage of breakout performers in 2013. Sometimes you can pick up some clues from looking at the underlying data, but there will always be people in your league that value one year of statistical production more than they probably should. If you are high on guys like Chris Davis or Josh Donaldson for 2014, just make sure that the underlying data supports your beliefs that their production from the previous year was real.

Conclusions

You can draft a roster full of “risky” players and still be successful without hitting on all of them as long as the risks you take are calculated ones and not shots in the dark. Spending an early fourth round pick on a risky player who you believe has low end top 30 upside, you probably aren’t getting a good enough price to make for a worthwhile investment. If you think the player has top 10 upside, it might make more sense there.

Individual owners will have different ideas on how much risk they are willing to take. Some people may be risk lovers, while others will be more risk averse. There is no single formula for success, but owners need to be true to what works for them. Make sure that the risk you are taking on each player you draft is proportional to the potential reward.

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Tommy Landseadel
Tommy L is also known as tlance on the CBS and Sports Hoopla message boards. He has been playing fantasy baseball for 16 years in many different format types and looks forward to helping you with your fantasy baseball questions! You can now follow me on Twitter @tlandseadel
Tommy Landseadel

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9 comments on “Risk Management

  1. Great stuff Tommy. I really like the inverse risk principal as it relates to high/low draft slots (also extends to expensive/cheap players in auction). Looking at risk as a combination of factors is also a great, and very important, point. Definitely necessary pre-draft reading.

  2. I always grumble about how I drafted Garret Anderson because he had never been hurt in his career… and that was his first year where he spent a good chunk of time on the DL, missing 50 games. You really can’t predict injuries as a whole. Players with past injury histories can certainly take a hit in value based on that risk. That’s why I won’t touch Kemp right now, and it’s why in our very early mock draft I steered clear of CarGo — need to know my first-round pick is starting healthy.

    • I think it is wise to avoid obvious risks in the first two rounds, but the flip side to the Garret Anderson thing is that sometimes those injury prone guys put together a full season. If the price is right…..

      I agree with you on Kemp. I have a hard time thinking that someone else is not going to be willing to take that plunge before me. With Cargo, though, I am stupidly intrigued.

  3. What’s the risk factor for an elite hitter like Robinson Cano moving from a hitter friendly park and a stacked lineup to a pitcher friendly park and weak sauce lineup? I understand the elite hitters will be elite wherever they go but am I an idiot for second guessing taking him in the first round because I’m just assuming he’ll get less RBIs and runs?

  4. Cano has always been picked so high because he is “safe”. There is definitely some risk that wasn’t there before, but remember that the Yankee offense was horrible last year and Cano had one of his best seasons. I still think he is safer than most, but you are right to be a little nervous.

  5. Thanks guys, now I can see why this site was highly recommended. You get quick and very knowledgeable answers/info. Keep up the great work!

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