Free agent market and the boom and bust cycle
We’ve made some asides in posts and comments about the “market price is market price” and “get in now” crowd, the latter of which need to have their keyboards taken from them.
Dave and I have both argued here, along with a host of smart people elsewhere, that like many markets, free agency is cyclical. New money comes into the market, Mike Hampton gets a bazillion dollars. Soon, second-tier free agents are being frozen out and crying collusion. Then more money comes in, and you get the Juan Pierre/Gary Matthews deals.
We’ve said that you’re better off investing in trades, player development, international free agents, taking on other people’s contracts, whatever – when the market for free agents gets so bad, you shop for what bargains you can get. If there’s nothing there, you’re better off walking away than doing long-term damage to the franchise.
At one point I compared people encouraging teams to spend now before prices went up even further to tulip speculators in late 1636. An even better contemporary analog is housing, though. In February last year, David Lereah (who has a dog in this race) wrote a book called “Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade – And How to Profit From Them” and people snapped it up.
The free agent market was compared to real estate investing: overpaying for free agents today meant you were underpaying for them next year. If you were interested in Player X and his asking price went up $10m between phone calls, you should sign him immediately because his price was going to go up again and that meant he was worth even more than his latest demand. And so on, and so forth.
Every time there’s a boom, these arguments come out: real estate is a fixed asset and can’t go down in value. Technology stocks are the product of technology that increases productivity. Tulips will always be pretty.
And the true believers end up underwater on four house mortgages, worthless shares of eTissue.com (the internet’s leading seller of personal and bathroom tissues), and some lovely flowers to plant in their garden.
Fortunately for purposes of our learning, we can go see the housing market stall and in some markets already recede. People who encouraged others to get involved in a bidding wars for houses are now pretending they never said anything like that. “It’s good news if the seller wants more money? Why would I ever say something like that?”
In 2000-2001, there were people arguing that a new free agent market had been established and teams were going to have to pony up if they ever wanted to sign anyone, that Mike Hampton and company would look like great values in a few years, just as today this year’s free agent contracts are heralded as the dawn of a new age. And in a few years, sooner for some of these deals, the contracts handed out will be recognized as clearly insane, the people who gave them derided for their irresponsibility. Then we’ll repeat.
Hampton did not turn out to be worth what he got just because he got it. Priceline wasn’t worth over $100 a share in the boom, even though people bought it, and analysts who pumped up Priceline at $134 a share were wrong, no matter their motivations. We’ll look at many of this year’s deals in the same light soon, but the lesson’s clear: be smart, and look to the long-term.
Anyone who has ever argued that you have to jump into an overpriced market, or that an overheated market can only ever increase is not a serious person, is willfully ignorant of both basic tenets of markets and of history, baseball and otherwise, and should not be listened to.