HQVAULT: The Rotisserie Paradox

Over the nearly 20 years that BaseballHQ.com has been in existence, and going back another decade to the Baseball Forecaster newsletter, we have accumulated hundreds of articles on fantasy strategy. These reside in the Strategy Library section of the site, and many include timeless tips on all aspects of fantasy league play, at various times in the fantasy league calendar. In a series to run occasionally throughout the season, we will be highlighting selected articles from the Library as part of a HQVAULT series. We welcome reader interaction with these older articles in the comments section below. Enjoy! —Ed.

The Rotisserie Paradox
by John Burnson

You see them every so often in business publications. They are stock-picking games, where entrants pick a stock and the winner is the person whose selection rises the most. These are not run-of-the-mill stock portfolios—it is not uncommon for the winning pick to log an amazing gain of 100% or more in just a few months.

Well-known companies like GE and Microsoft rarely win such competitions. They are already too dominant, so they don't have room for surprising moves, and they are too well covered, so their fortunes tend to be accurately priced by the market.

The winning stocks tend to be ciphers. They usually are tiny firms, crawling under the radar of analysts, and their success hinges on the outcome of a single highly influential event, like the receipt of a big contract or the certification of a new drug. People who picked the stock did not know that the stock would rise, but they knew that if this highly influential event came to pass, then the stock would do very well. Furthermore, the duration of these games is brief—a six-month game is typical—so participants can direct their research toward sensationalism, not sustainability.

In a word, the winning participants speculated. They understood that a low-profile, high-upside pick offered the only realistic chance for victory in a setting where the track is short and where performance (and perception) are fluid.

We believe that stock games have something to teach us about the game that we play. "Ah," you say, "but, in the spectrum of randomness, stock-market games are a world apart from fantasy baseball." Yes. Fantasy baseball is much, much worse.

Let's look at some ways in which our "investments" are more volatile than stocks:

An investment in fantasy baseball is based on spotty data

A traded company provides financial information every quarter, and investors can follow developments in the press. However, when you place a bid on Draft Day, you are doing so on the basis of information that is six months old. The span from October to March has little data but plenty of noise. Did the player work out or slack off? Was he energized by his team's play or demoralized by it? Did he kick a bad habit or start a new one? We get these news stories in a random fashion. Moreover, this pattern of six months of stats followed by six months of noise extends backwards indefinitely. Nobody would invest in a business with such erratic reporting.

An investment in fantasy baseball can vanish in an instant

In most corporate scandals, details come out over a period of days or weeks and get analyzed over time, so an investor has time to staunch his losses. However, if your $40 outfielder collides with a wall, your outlay can be immediately and fully lost (perhaps even before the season starts). Even an awkward step off a Stairmaster can result in a lost half-season.

An investment in fantasy baseball can be forced to relocate

Imagine GE being told to move to a given country. That is the fate of a traded player. A baseball player on a new team plays with different teammates, under different managers, and against different competition. Under such circumstances, what faith can you put in the player's previous prospects?

An investment in fantasy baseball is a bet on one person

A company can have imposing personalities in high positions, but it is still a collection of people. This diversification helps smooth the bumps in a firm's fortunes; a bad showing by one area can be offset by a good showing by another area (and vice versa). Baseball players lack this cushion. They have only one body, one brain, and one heart. This "single point of contact" means that players can more easily confound expectations than companies can.

An investment in fantasy baseball has his fate in one person's hands

Baseball players cannot prove their worth on their own initiative. They are granted playing time by managers, who are human beings with biases and whims. With the guidance of a manager, a week-long slump can become a month-long benching, or a burst of power can become a full-time paycheck.

Be a consumer of upside

Our "investments" makes stocks look like paragons of stability. The unpredictability of ballplayers, combined with the six-month season (like in stock-picking games), invites one conclusion: Fantasy players should be voracious consumers of upside.

Don't believe that speculation is the key? Follow the money. An annualized rate of return of 10% is quite good on Wall Street, but you will never win your Roto league by turning $260 into $273. A championship team often ends the season with a profit of over $100. That annualized return of 75% can be the result only of rank speculation.

If you still don't want to speculate, consider that your opponents will be doing so even if they don't realize it. Owners who drafted Mike Trout before his rookie season had a much greater chance of winning their league.  Yet it was not obvious in most leagues that Trout was a must-get player.  He wasn't even on the team until late April.  Trout was the kind of player whose owners discovered during the season was a great investment.  When your foe can stumble into a tremendous investment gain, you must speculate ruthlessly.

How the original Rotisserie rules discourage speculation

Naturally, then, the Founders of our sport instituted a highly counter-speculative framework.

The opposite of a system based on speculation—in which the best investments have the highest upside in the short term—is one based on value, in which the best investments have the lowest downside in the long term. Despite the fact that ballplayers are relatively shady investments, and that seasons are relatively short, the Founders imposed rules that steer owners from speculation and toward value.

First, the Founders required us to spend a large sum of money. Suppose that you scan the Baseball Forecaster and find five speculative plays at $3 each. In a stock-picking game, you would be evaluated on the return of those five picks. In Roto, though, you still have $245 to spend! This amount swamps your speculative bets.

Not only did the Founders foist a budget on us, they also forced us to buy stocks in certain "markets." Can't find a third baseman with promise? Too bad. Would you rather not spend even $2 on a pair of catchers? That's great, now get in line.

This is the Roto Paradox: that in a game with such fickle short-term returns, we are rapt by long-term value. The burden of a budget and the allotment of positions wrongly divert our attention to the preservation of capital. Value can maintain a Roto championship, but it can't win one; that requires speculation.

How fantasy baseball is NOT like stock picking

But how to do so? We have painted a bleak picture of the ability to capture upside in Roto's constrictive format. However, in our list, we omitted two key differences between stock-picking games and fantasy baseball that grant hope to speculators.

First, fantasy leagues are much smaller than stock-picking games. It is easier to beat 11 opponents than 11,000. Consequently, although your fantasy portfolio should still be geared toward upside, you need not resist everything of value.

The second distinction of fantasy baseball is that you can deal. Upside is essential, but there's nothing to say that you must grab all of it on Draft Day. A reliable tactic is just being on good terms with your fellow owners. Every league sees a handful of lopsided trades each year; you want to be at least considered for all of them.

Whom to speculate on?

Take your cue from the winners of the stock game. You want "investments" who are overlooked and whose earnings could multiply with one bit of luck. One category is once-skilled players returning from injury rehabs. Another group is solid understudies playing behind seemingly dependable stars.

You want every player on your roster to have a scenario in which he earns $10 over your price. Here is a tip: Pick players who have done it before. In a recent issue of Money magazine, the editors reviewed their stock filters from last year. Although some arcane strategies fared well, an old stand-by came through again: "Buying stocks simply because they're cheap and out of favor continues to be among the most rewarding strategies." Note both descriptors -- not simply cheap but also out of favor. Like the stock market, fantasy ball is a game of perception. Use sabermetric gauges like xBA and H% to spot guys who are unfairly marked down.

If, as we argue, a Roto season rises and falls on one's long shots, then your best friend this year might be BHQ's Batters and Starting Pitcher Buyers Guides. These will point to players with upside, and they will be good companions in the event that your speculation pays off and you want to cash in some upside for value.

Conclusion

Don't be distracted. You are not buying stocks to hold for three years; you are buying baseball players to hold for six months. Your success will be determined by your dark-horse candidates. Yes, your bids on Draft Day might earn some chuckles. But when the game is speculation, you have to endure a few early laughs if you want a chance at the last one.


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  For more information about the terms used in this article, see our Glossary Primer.