This is a guest post from my good friend, Mr. Credit Card, from www.askmrcreditcard.com. For the past three years, his Philadelphia Phillies have been the nemesis of my beloved Los Angeles Dodgers.
I certainly feel we can learn a lot from how baseball teams run their franchises and how they develop, buy, and trade players, and then apply that to our financial lives.
The Rumors and Free Agent Market – Baseball season is over and fans and aficionados are now eagerly watching the free agent market to see which players go where and who buys who. There are several top free agents in the market, but I want to highlight two in particular.
Firstly, Jayson Werth, who is the right outfielder for the Phillies the last three years is a free agent this season. Actually, he was a free agent until he signed a $126 million, 7-year contract with the Washington Nationals earlier this month. As the top right-handed outfielder in the free agency market this year, folks justifiably expected him to demand top wages and a fat contract, and he got it. As a point of reference, Matt Holiday landed a seven-year, $120 million contract the Cardinals last off season.
Cliff Lee is also another huge free agent in the market this year. He was acquired by the Phillies in 2009, but was traded this past season because it was perceived he wanted to test the free market! He moved to the Seattle Mariners and was later traded to the Texas Rangers before the trade deadline this year. He was obviously a big factor in the Rangers charge to the World Series.
Over the past three seasons, Lee was 48-25 with a 2.98 ERA, 17 complete games in 93 starts, five shutouts, 667 1/3 innings pitched, a 1.122 WHIP.
Lee is 7-2 with a 2.13 ERA, three complete games in 10 starts in the post season.
Although Werth is now off the market, baseball clubs still have to make a decision as to whether or not to bid for Cliff Lee and, if so, what they’re willing to pay him. As I eagerly watch the free agent season play out, I can’t help but see the parallel between the financial decisions baseball clubs make and personal finance decisions us fans make. Here’s my take.
Never Settle For Being Average – Because Top Guys Get Paid A Lot More – Some of you might be astounded by the numbers that Werth and Lee can command. Well, that is reality folks. The top guys in any industry, whether it is the CEO, company founders, music artist, make a heck of a lot more than the average Joe in the same industry.
The top hedge fund owners with billions under asset management take home a lot more than the small ones with a “couple of hundred million in assets.” Likewise, top music artists rake in a lot more than than average ones, and the top movie superstars make lots more than their supporting cast mates and even the people actually producing the films! Yes, that’s life.
Open a pizza shop in your neighborhood and you are still an employee for yourself and making employee wages! Open a few more stores, and your rewards go up! Franchise your restaurant nationwide and you will become a really wealthy — and if the world world likes your product, then the gap between your wealth and that of the common folks widens to astronomical levels.
So never settle being second best. Always strive to be the best in your work, your career because the rewards for moving up the ladder are exponential indeed.
Live Within Your Means – From the players, let’s move back to the baseball organizations. Yes, Jayson Werth got a huge contract. So why didn’t my Phillies sign him? It’s because they already have a $146 million payroll. Even they need to “budget” just like the rest of us. If they signed Werth, they would almost certainly have had to sell or trade a highly paid player to make room for Werth’s salary.
On the other hand, the Pittsburgh Pirates are not exactly an elite team. In fact, their payroll was only $36 million for 2010. Contrast that to the New York Yankees ($200 million) and there is a vast gap in their resources. Since the Pirates are certainly not playoff contenders, they have to settle for much less if they want to operate with their finances in the black.
The bottom line here is, whether we are millionaires, a billionaires or thousandaires, we all have to live within our means because, unlike the federal government, we cannot print money!
Always Consider Long Terms Costs And Obligations – There is always considerable debate as to how long a contract any club should offer a free agent. Lee and Werth are obviously valuable now, but the big question is will they still be good players down the road.
In our own personal finance lives, we have to consider long-term expenses as well. For example, trying to decide how big a house can we afford. Even if we can “afford” one based on our “present income”, bear in mind that our “future income” may not be the same. It could be lower!
This is not to say you should not take on any long term financial obligations. But you have to make sure you are getting great value out of it and not overpay for these items.
There Are Different Paths For Different People – The Yankees are the biggest franchise in baseball. Their huge fan base allows them to get even bigger, spend more on very good free agents and keep winning. Their strategy has always been to be the biggest franchise. This is the same strategy followed by other big sports club like the Los Angeles Lakers and Manchester United.
The Yankees do not mind paying up for a free agent because they dislike trading their farm system.
Compare them to the Pittsburgh Pirates, who are obviously not a household name. For them, being the best baseball team and having the largest franchise is not realistic. So their approach on free agents is different from high-payroll teams like the Yankees and Phillies. Since the Pirates cannot afford top-tier talent they rely almost soley on their farm system.
We as individuals also have to plan our personal finances around our goals, objectives and means. For instance, should we open a joint account? Should we save our money or use it to pay down debt? How much should we put aside for retirement? No one can answer those questions for us; we have to do what is right for us. For example, some people can afford the annual fees and perhaps benefit from carrying an American Express Platinum or a Chase Sapphire credit card, while other folks may simply choose not to carry one at all because it might lead to overspending and credit card debt.
Be Creative And Seek Value – The Phillies didn’t decide to sign Werth to a long term contract, but they can still be creative and perhaps find a way to offload another player like Raul Ibanez, and then rely on Ben Francisco and Dominic Brown to platoon right field.
We face similar decisions in our financial lives as well. Which house should we buy? Which car should we buy? Should our kids go to public or private school? If money is no object, then there is no decision to make, but for most people money is a constraint, so we have to prioritize and decide which choice provides the most value.
Treat Your Household Finances As A Business – When a baseball player gets traded against his will, or if a club does not want to renew his contract, he usually says “it’s only business.” Yes, it is business; a baseball organization has to do what is right for the franchise. It is the same with our household personal finances. We have to approach them like a general manager of a baseball club. We need to plan ahead and make decisions that are right for our individual situation.
I’m sorry but no baseball player should be worth $126 million. Actors either for that matter.
Why not?
If Nationals ownership is paying Jayson Werth $126 million, you can be fairly certain that he’s enriching the team by a lot more than $126 million. Your ideal world might not be congruent with the actual world, but that’s how things work. People get paid in proportion to what they bring to the table.
Teachers don’t get paid as much as all-star catchers because of a little thing called scarcity. There are millions of people who can do the former job, fewer than a couple dozen who can do the latter.
I’m just mad the Dodgers let Jayson go for nothing a few years ago.
It is amazing what professional athletes and such make. Obviously the superstars bring revenue to the team, and thus get rewarded for that. If only teachers generated revenue…
I’ve told my kid this a thousand times, that a .300 hitter makes five times what a .250 hitter makes. I hope he learns this lesson.
At some point, I hope the bubble in professional sports pops. The players make way to much money compared to the fans who pay their salaries. This year, I didn’t renew my Angels season tickets, because I don’t think the entertainment value is worth the cost.
That is a great lesson, Bret. I’m going to start passing that one on to Matthew!
Bret – I am using this analogy to encourage my kids never to settle for second best. I told him that Roy Halladay or Cliff Lee will not be happy just lasting 7 innings and that they will not be happy if they got 89 for their math test. They are the type of people that will always want to be the best, to score 100 for school test, to pitch a complete game..etc.etc..
And yes, we are at fault for this “pay hike”these folks get. I mean, $8 for a hotdog (and not a great one either)? The less people who spend $8 for a hotdog and $10 for a can of beer, the less these folks will pay. But hey, if you look at Citizens Bank Park, it’s full every game.
Candy
I understand where you are coming from. But I guess reality is that wealth follows demand. There is demand for baseball tickets.
Is Bill Gates worth what he is worth? He was fortunate to purchase the rights to an OS (from IBM!) and it later became a monopoly and the OS is full of bugs!
Lot of other examples but where do you draw the line? $1mm, $10mm, $100mm?
I love this post, not only because it points out that anyone and everyone is worth what the market is willing to pay them, but because it is a challenge to strive for excellence. Maybe no one reading this will every be worth (or Wurth) $126 M, but we can all strive to make ourselves more valuable than we are now.
BTW, as a Card fan, I didn’t gripe when the Cards paid big bucks for Holliday, and I won’t gripe about whatever they pay to keep Pujos in the future.
Nice one! Very good comparison that makes those principles funny to read and easy to understand.