For those of you watching the draft on Thursday, there was a little bit of shock around the table when the Cubs selected Indiana's Kyle Schwarber with the 4th overall pick in the draft. It wasn't that Schwarber wasn't a good player, but he was, in their minds, far behind players like Nick Gordon and Alex Jackson. In the prospect rankings, Gordon and Jackson were rated consistently in the top 10, whereas Schwarber ranked only in the mid-teens.
The immediate assumption was that the Cubs were taking a lesser player in order to spread money throughout the draft. Then Cubs Director of Scouting Jason McLeod claimed that Schwarber was #2 on their board, behind only California prepster Brady Aiken. Assuming that's true, and I believe it is, how is it possible that the Cubs' rankings were so different than the experts rankings?
An answer to this leaves the realm of baseball and goes into the real of investing. Certainly there are similarities between the two, as highlighted by Jed Hoyer's statement last month that in the MLB draft, "You're buying careers, you're not buying seasons." So whereas investors buy companies to get a string of future cash flows, baseball GMs buy careers to get a string of future WAR. Traditionally, investors have been broken down into two different groups: value investors and growth investors.
Growth investors, as the name implies, look for companies that are situated to significantly increase their sales over the coming years. They will pay far more than the company is worth today in the expectation that, over time, increased revenues and profits will cover their initial investment. The stocks of the "tech bubble" are a good example of the trade offs inherent in growth investing. While some of those companies -- Apple, Amazon, QUALCOMM -- have grown into market titans and repaid their early investors, far more -- Cisco Systems, Dell, and, famously, Pets.com -- either stagnated or failed altogether.
Value investing, made famous by Warren Buffett, focuses on assets that are undervalued in the market. The classic value investor looks for companies with either assets or cash flows that are worth more today than the market price. This type of investing tends to be safer than growth investing -- since you are buying assets at a discount -- but lacks the explosive returns growth investing can provide.
A balanced portfolio, however, will include a collection of both types of stocks.
This concept can be applied to baseball prospects fairly easily. "Growth" prospects would be young, generally high school, level players with holes in their games that you expect will improve with time and age. In the Cubs system, Javy Baez is an excellent example of a high schooler drafted with an amazing collection of tools but a lot of refining necessary in his game. He has done a lot of that refining, though there is still work to do before he is ready for the majors. Jose Fernandez is an example of a high school pitcher who improved his slider, change, and command after being drafted to become a legitimate ace before elbow surgery put his future in doubt. Josh Vitters and Kyle Drabek are examples from the much larger group of high school players who never developed the skills necessary to be impact players in the majors.
If that's growth, "value" would apply to prospects with a current set of skills that makes success in the majors a reasonable conclusion. These will almost always be college players for the simple reason that men's bodies have filled out at 21 but not at 18. Moreover, given that pitching prospects tend to be so risky -- as in TINSTAAPP (there is no such thing as a pitching prospect), the better value historically has been with the college hitter. This doesn't guarantee elite players -- consider Pedro Alvarez -- but it does give a reasonable chance of getting major league average production out of the pick.
So where is the disconnect? Prospect gurus tend to see ceilings and extreme upside of every prospect. In the most recent draft, for example, Kolek got high marks for his 100 mph fastball while his weak secondaries were often overlooked because lots of high school pitchers need to work on their secondaries. If Kolek doesn't work out, their jobs go forward with no hindrances. This is not to demean the prospect experts. They serve a valuable role by immersing themselves in prospects and helping to educate us on what their ceilings really are.
However, GMs are in a different position. For a GM, the draft is an opportunity to add young talent into an organization which can be used to build a team. Some GMs, obviously, go with the highest ceiling player available with a strategy much like the growth investor -- if just one of every five hits, he's set. However, I would argue the Cubs' front office is taking a value approach early in the draft to give their drafts, as a whole, a reasonable floor. Consider their 1st round picks: an extremely polished high school outfielder and two college hitters with an advanced approach. This year, they took it a step further by taking an advanced college pitcher in the second round and an athletic college catcher in the third round. After that come the upside picks: Pierce Johnson, Paul Blackburn, Rob Zastryzny, Jacob Hannemann, Carson Sands, Dylan Cease. So far, the Cubs have used the first pick for a safe bat, but that doesn't have to be the case. For example, there are reports that if the Cubs had gone with Mark Appel in round 1 last year, they were prepared to take 3B Ryan McMahon in round 2.
This strategy looks to provide a stream of solid major league players while, at the same time, planting the seeds for extreme returns should some of the later round picks work out. So, for the Cubs, a guy with a very good chance of being, at the least, a major league average first baseman has a lot more value than a guy like Alex Jackson, who could stall in the minors if his game doesn't improve. It's a pick that let's them gamble on high upside arms in rounds 4 through 6 without sacrificing the entire draft if they don't work out.
Now we turn from the draft to the trade deadline. What are the implications of this strategy in trades? The Cubs will demand AA and AAA talent in any trade for Jeff Samardzija with, perhaps, a high ceiling low minors talent included in the deal. This is because talent that has succeeded in the upper minors has a better chance of success in the majors than talent in the low minors who still have to refine their skills. Consider the two Garza trades. The first trade, for a year and a half of Garza, yielded Martin Perez and (pre-concussion) Mike Olt, two players who were on the verge of the majors. Perez looked like he could be, at worst, a middle of the rotation arm (injury has cut that short) and Olt looked like a major league average third baseman if he could cut down on the strikeouts (jury is still out, but it isn't looking good). A year later, when Garza's short term contract took Perez out of the picture, they had to settle for a damaged Mike Olt and two organizational top 20 prospects (Grimm and Ramirez) who were near major league ready to provide the floor of the trade, with young arm CJ Edwards providing a nice upside if everything worked out well for him.
Filed under: 2014 MLB Draft