The Details on Albert Pujols' Deal
by Matthew on Jan 9, 2012 6:21 PM PST
in Around Major League Baseball
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PrintOver the weekend the Angels and Albert Pujols finalized the details on their contract. Or possibly they had finalized them before and just chose now to release that information. Jerks. I wrote up the ramifications up in more detail on FanGraphs and I'd recommend visiting here if you want all the nitty contract details concerning numerous incentive clauses. For my piece on FanGraphs I was interested in the base guaranteed salary and how back loading it affected the contract's net present value.
Ten years from now, we can look back at Pujols' performance and the eventual inflation rate in baseball salaries and hindsight judge whether it was worth it. For now, we have to guess at both. I think the best estimation is roughly 5% over the long haul as teams continue to explore and find new revenue streams (e.g. booming local TV deals) but have to deal with shrinking on-site revenues either from the economy at large or from a preference shift in more people being comfortable consuming sports via their own televisions. I certainly enjoy not charging myself $9 for a beer and there's far less screaming children and drunken frat boys in my apartment than at Safeco Field. Besides the inflation rate, there's also the current base to deal with, namely, 5% inflation of what? The what is how much are teams right now spending on purchasing wins in the free market. I believe that figure has dropped from at or near $5 million per win down to the mid-4 range this winter.
My conclusion is that given the current market, the Angels paid Pujols for something in the realm of 47 WAR of production and I'm skeptical that he manages to hit that mark. Another 47 WAR for Pujols would put him near 135 career WAR making him the sixth best position player in baseball history by that measure behind Ruth, Bonds, Cobb, Mays and Aaron. A comparison I like is Alex Rodriguez. Pujols was better over their comparable age-span (age 21-31), but the difference is small and from age 32 (Pujols' current age) so far, Rodriguez has been worth only 15-20 WAR in four seasons.
Originally I thought Pujols would come within throwing range of the 45 WAR mark over the next decade, but I'm now less sure. I think there's a definite chance of him clocking in around 25-30 WAR if the injuries and decline start to mount up and we've seen how they can do so in a hurry post-30 to people not named Barry Bonds. On the other hand, there is no floor.
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I think injuries are going to prevent him from reaching that level of production.
I don’t know how fair it is to choosing his total WAR values though to expect a player to get seriously injured at some point in the next several years.
...and now I'm here
I agree.
Guys who stay productive until 40 are exceedingly rare, I’d expect him to stop being an effective full time player by the time he gets to his late 30s.
That poll is telling how bitter M's fans are
Now then, I really do hope he vastly under performs his contract, just because fuck the Angels and all that good jazz. But realistically, I don’t see him producing much under 40 WAR unless he gets seriously injured.
"Tell my tale to those who ask. Tell it truly, the ill deeds along with the good and let me be judged accordingly. The rest is silence." ~ Dinobot
Drunk obnoxious people at SAFECO? I've definitely never been one of them
by Fett42 on Jan 9, 2012 6:43 PM PST via mobile reply actions 1 recs
Not sure I've ever even seen one.
Safeco might be one of the sleepiest stadium experiences in baseball (King’s Court days notwithstanding).
I've seen plenty of drunk people are Safeco
Don’t recall many of them being drunken frat boys though. In my mind they’re all middle-aged men and early thirties women pretending to be 22.
You have never sat in the CF bleachers and looked down into the bar area then.
It’s popped collers for miles.
How come you can do all this other great shit, but you can't lie the fuck down and sleep?
by JAH on Jan 9, 2012 8:40 PM PST up reply actions
Definitely would have to agree with the early thirties women
I’ve encountered those drunks many a time
How much would the adjustment from NL to AL
affect his playing, especially within his first few years?
"You are the molders of their dreams." - Clark Mollenhoff
The deal with Albert Pujols is that he's a stupid jerk
by Poochie on Jan 9, 2012 8:53 PM PST reply actions 15 recs
60+ WAR
Because the baseball gods hate us (but not as much as the Cubs)
I'm not going to vote, I have no clue.
Just remember, they still have $60MM+ of Vernon Wells for the next three years. If we’re really lucky, Pujols and Wilson will start to decline around that time so they’ll still have an albatross or two.
From age "32" (Pujols' current age) ...
I think that’s the key right there…
If he’s really 34 or 35, and my gut tells me that he is, then it’s much less likely that he achieve over 45 WAR. I assume he’ll have 2 or 3 more hyper premium seasons that’ll bum us all out, then 2 or 3 very good seasons, then a couple of seasons in which he limps along at league average levels trying to pad his career stats.
I believe the Cards let him go because they know him best of all, and couldn’t choose to make this duration of commitment to him because they knew in their situation it would bury them financially. Whereas Arte Moreno might have suspicions, but with the Dodgers on the skids due to their ownership situation, he sees this as an opportunity to take over the hearts and minds of the baseball fans of the Southland, sort of like the Clippers are trying (with the help of David Stern) to usurp the fan-base of the Lakers.
As an aside, I liked it much more when the Angels had a GM who was an idiot.
My gut tells me that Albert Pujols isn't Albert Pujols at all, but in fact an Ancient Alien
by SuperDopaLiciousFunkStar on Jan 10, 2012 6:04 AM PST via mobile up reply actions
Don't do that.
It’s bad enough that the Angels got Pujols, much less an awesome Ancient Alien!
Must resist. Urge. To post. Ancient. Aliens guy.
Urge. Growing. Growing. Fading. Fading. Growing. Fading. Fading.
"Tell my tale to those who ask. Tell it truly, the ill deeds along with the good and let me be judged accordingly. The rest is silence." ~ Dinobot
by beastwarking on Jan 10, 2012 9:52 AM PST up reply actions
My gut tells me Pujols is actually 20
by Graham MacAree on Jan 10, 2012 8:56 AM PST up reply actions 1 recs
I don't think you understand NPV very well
The NPV of the contract does not depend at all upon future realized inflation, and it is in fact entirely known today.
The contract is guaranteed in nominal dollars. The appropriate discount rate is the risk free (US Treasury) nominal interest rate. That is easily observed in the marketplace for all maturities as of this moment. Simply take those nominal rates and discount the cash flows back to the present time.
In fact NPV of any kind never depends upon the realized inflation. Inflation is a random variable and at best using the realized rates only gives you one observation from the distribution of possible outcomes.
Furthermore using just in the inflation rate entirely ignores the real rate of return, which you need to account for.
Use the observed current nominal US treasury rate. This incorporates both expected inflation as well as a real rate of return and does an appropriate job of matching the riskiness of the cash flows as well.
And you don't understand tact at all
but that’s fine. No, wait, it’s not fine. Not at all, but I’ll give this another shot since people at FanGraphs had the same trouble divorcing themselves.
The result is heavily dependent on the eventual inflation rate in baseball salaries.
I worded this poorly and have since updated the post to hopefully better convey what I intended when I wrote “the result”.
The baseball player market is not the global economy and this is not an accounting or otherwise financial world analysis of investment. It’s the closed market of baseball. The rate of CPI, US Treasuries or anything else you want to rattle off is fine and dandy for the former world, but that’s not the one we deal with in here.
The inflation is in the market cost of $/WAR. That’s what matters because that’s the comparable place for the Angels to purchase players.
by Matthew on Jan 10, 2012 10:12 AM PST up reply actions 6 recs
At least you've worded it better now
If by “worded poorly” you mean “made an entirely false statement” then I agree with you.
Look, you can do two things. You could try and determine the NPV of the dollars in the contract (i.e., what Pujlos is receiving). Formerly, especially with your example of “how much money do I need to invest today to have enough to pay off the contract in X years”, that is what the article previously suggested you are trying to do. If that is your goal, it should be done as I describe above.
You could also try and determine the net present value of Pujlos’ future production (i.e., what the Angels are receiving) which you seem to want to do. I’m sure you can see that the crucial difference between these two is that what Pujos receives is entirely riskless while what the Angels receive contains an enourmous amount of risk.
If you want to try and discount the value to the Angles that is fine, but you absolutely cannot use the eventual realized $/WAR inflation rate or even an unbiased estimate of that to do so. You need to use a risk-adjusted cost of capital rate in order to appropriately discount the values. There is an enormous difference between saying “I know that the $/WAR inflation rate will be 5% with certainty” and saying “I think the distribution of $/WAR centers around 5% with equal possibilities of a 0% and a 10% outcome.” Finally the value that the Angels receive would have to be futher discounted for the variability of Pujlos’s expected performance, which is likely quite large.
Are you trying to claim that the baseball player market does not have to deal with risk or uncertainty? I hope not. A fundamental concept of NPV is that you discount the future cash flows at a discount rate appropriate to the riskiness of those cash flows. You are entirely ignoring the risk component.
Try not being a dick sometimes and see how much farther that will get you around here
If by "worded poorly" you mean "made an entirely false statement" then I agree with you.
That was completely unnecessary.
by pdb on Jan 10, 2012 12:03 PM PST up reply actions 5 recs
Huh?
Using the Treasury Rate as a discount rate in an NPV calculation is just silly. Successful businesses have to take financial risks, so to use the risk-free rate as a comparable measure is just plain bad business.
As an accountant myself who worked at an investment firm for years I love talking about accounting, finance and economic principles with family and friends when the situation arises. But on those rare occasions when I decide to argue principles, while I might be right most of the time, I generally find that I’m the one being referred to as the loser.
I would welcome any feedback or corrections you have to make on either this or the linked FanGraphs piece.
I have realized that I, as is unfortunately common for me, didn’t adequately show my work so to speak, and leapt over conveying a few steps in my thinking when I dragged the NPV equation into the matter. I’ve tried to make it clearer especially in the FG article why I referred to it as I did, but if that’s still not clear or not entirely correct, I’d like to know.
Silly?
No. You need to match the discount rate to the riskiness of the cash flows. For cash flows coming from a corporate project, I agree that using the US Treasury rate is silly. For cash flows that are guaranteed and risk free, using the US Treasury rate is perfectly appropriate.
You may be correct in your claims, but you're going about this all wrong.
If you have it all figured out and think Matthew’s conclusions are flawed then please write up a fan post with your calculations and conclusions. Right now you’re just being an ass by pointing out problems with no tact. If you have problems with someone’s work it doesn’t fly to just say “you’re wrong”, you need to demonstrate why and offer up an alternative answer.
For example: You misspelled the player’s name repeatedly. It’s “Pujols”.
No matter where you go, there you are.
Thanks for the correction
I’m not the best speller.
You are frustrating.
I’m willing to listen to critiques and I certainly admin that I’m not a master of every discipline that I reference. I make mistakes and I actively hope to correct them so that I can be someone who helps pass along the right methods, not the wrong ones.
And you might have something meaningful to contribute or you might be constantly misunderstanding, spouting jargon and being an ass about it. It’s difficult for me to tell because your method of communication is so entirely at odds with mine. You don’t tack your criticisms onto specific passages, you constantly assume instead of question first and you put words in other people’s mouths.
I’ve tried to meet you halfway and understand where the confusion is coming from, but your off putting attitude, obstinance and general dickishness to me and other people have now gone past my threshold. Either learn how to interact in a polite manner or go away and start your blog.
Thanks for the feedback
I will try and make my points more specific and quote your writings if that helps and ask more questions.
I don’t have any interest in or time for starting my own blog. Guess you are stuck with me.
Question: is if fair to say that your goal is to analyze in an NPV-type way the value that the Angels are entitled to, in WAR, from Pujols’ contract?
Here is what I would suggest
First convert each yearly cash payment into a WAR value at the current $/WAR.
This gives the expected WAR (in today’s value) that the Angels have paid for.
Now you need to discount that WAR back to the present time. It is important to use a discount rate that reflects both the time value of WAR and the risk of those WAR figures.
The time value incorporates both the idea that WAR next year costs more than WAR today but also that WAR today is more valuable than WAR next year, even if they cost the same. This means you have to use a rate higher than the expected inflation rate in WAR.
You then need to adjust that rate for risk. I don’t know of a good way to do this and would be very interested to learn more about it. I would suggest maybe start by computing the expected volatility of Pujols’ performance relative to the expected volatility of the average across MLB, and use that ratio as an adjustment. This won’t fully adjust for the total risk, but it would adjust for the risk relative to the average baseball player.
Anyways once you do that, you can discount the WAR back to the present. This would be the present value risk-adjusted WAR that the Angels have purchased via Pujols’s contract. This value would easily be compared to the cost for signing a 1 WAR one year contract where you have average certainty of actually receiving that level of play. The amount below this hypothetical series of 1-WAR players should give a reasonable idea of how much the Angels have paid for that WAR, relative to what they could buy with average risk and no time factors. In sum, a way to compare a risky long-term contract to a single year contract.
I haven’t spent much time thinking through this so there may be some problems with it. Happy to hear your thoughts on the suggestion.
Your suggestion is the same as the math that I did.
I just did it on the salaries instead of the $/WAR because, for the layreader, if they disagreed on the discount rate, it became a matter of simply changing two numbers (the NPV of the salary outlays and the current $/WAR) rather than constructing an entire summation for themselves and I provided a range of likely NPVs to allow people to plug-and-play as they chose. It’s probably not the proper action, but it’s ultimately the exact same result and I think it’s easier for more people to grasp quickly.
You’re arguing for a higher discount rate, but I disagree that WAR today is more valuable than WAR next year regardless of cost. Why would that be so in a significant manner? In fact, that flies in the face of a lot of the arguments around Prince Fielder and how his 3-4 WAR improvement this year would be less valuable than a 3-4 WAR improvement in the future. WAR itself isn’t inflationary.
The risk in variable performance (and injury) of long term contracts was factored in. It was looked at in the past and found that teams get about a 10% discount as contracts exceed past 3-4 years. I accounted for that.
by Matthew on Jan 10, 2012 3:50 PM PST up reply actions 2 recs
Real rate of return
I disagree that WAR today is more valuable than WAR next year regardless of cost. Why would that be so in a significant manner?
WAR today is of course more valuable than WAR tomorrow, even without inflation. This is the exact concept of a real interest rate. What would you rather have, a $40,000 BMW today or a $40,000 BMW (same car, no inflation in the dollar) tomorrow? What would you rather have, a 2012 World Series title or a 2015 World Series title? If you are to discount future values and compare them to present values, whether it is cash or some other measure of value, you need to take the real return into account. This is a fundamental insight of DCF analysis.
Yes the math behind the discounting is the same. The math itself isn’t complicated. What’s important is the numbers you use to do the discounting. Garbage in, garbage out. That’s why I have been stressing the importance of understanding the theory behind how you need to determine the discount rate.
Taking a 10% risk adjustment off the top is not really the right way to do it. You need to incorporate the risk adjustment into the discount factor itself. Cash flows, or WAR values, further out in time need a bigger risk adjustment than the near term cash flows. This will happen as you compound the discount rate factor, so the risk adjustment should be done at that stage. And I was also arguing for a player-specific risk adjustment. Note that this could be either positive or negative, if we evaluate this compared to the risk level for the average player.
So use a different number for the discounting then or do the specific risk adjustment yourself.
Look, I intentionally tried to keep this simple for people. I left out, and mentioned I was leaving out, aspects of the contract such as incentive clauses, perks and the consulting gig post-retirement. And there’s benefits to the organization left out of simply WAR. I left off some terms on both sides of the ledger for means of simplicity and because I don’t think they affect the overall estimate greatly. If you disagree with that, point out where, why and by how much.
You think there should be an interest rate on WAR? How much, exactly? Why? Is it worth adding the complexity?
You want an individual factor accounting for the specific volatility of Pujols’ performance compared to the average player? How much should it be, exactly? Why? Is it worth adding the complexity?
I coached values in ranges and round numbers. It’s an approximation and so far you’ve done nothing to convince me that it fails at that. If you want to delve into a thesis on the exact specifics of every bit of everything surrounding the contract, then you should write that up yourself.
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