The New York Yankees' Investing Blunder Cost Derek Jeter His Last Playoff Run

Buy low, sell high. That's the main focus of millions of investors -- and quite a few baseball executives. Just as everybody wants to be the investor who bought Apple for $7 per share in 2002 and flipped it for $700 a decade later, every baseball executive wants to find cheap (or relatively cheap) talent while trading away high-priced veterans for future stars.

The Yankees' flawed strategy last winter cost Derek Jeter a chance to go out with a bang. Photo: Wikimedia Commons.

In recent years, the New York Yankees front office, led by Brian Cashman, has moved toward this philosophy. In each of the past two seasons, the team has tried to save money by signing a hodgepodge of veterans who came cheap due to injuries, age, or declining performance.

Each year, this strategy briefly looked like a success, and Brian Cashman was hailed as a baseball genius. However, the New York Yankees were making one of the most basic investing blunders: focusing on price over quality. In 2014, this attitude probably cost the Yankees a playoff spot -- and Derek Jeter's last shot at October glory.

Roster retool
On the whole, the Yankees were quite active during the 2013-2014 off-season. They gave Japanese star pitcher Masahiro Tanaka a $155 million contract -- after paying a $20 million posting fee to his Japanese team. The Yankees lured Jacoby Ellsbury from Boston to the Bronx with a $153 million deal. Catcher Brian McCann got a five-year, $85 million deal.

Still, the off-season was defined by "the one who got away": Robinson Cano. Cano had clearly been the Yankees' best player for several years. From 2010 to 2013, Cano averaged a "wins above replacement" value of 7.2, according to ESPN (using a formula from Baseball Reference).

This means that, on average, Cano contributed seven more wins a year than a typical minor-league replacement. He leveraged that performance into a 10-year, $240 million contract from the Seattle Mariners. The Yankees weren't willing to go beyond a seven-year, $175 million deal. (Cano reportedly offered to stay for 10 years and $235 million.)

The NY Yankees let their best player, Robinson Cano, walk away. Photo: Wikimedia Commons.

The rationale
Why did the Yankees let their best player walk away over $60 million that wouldn't have come due until after 2020?

Many people believe the answer is that the Yankees were determined to avoid becoming saddled with overpaid veterans. Recently, this has been a recurring problem for them. The Yankees gave out long-term contracts and extensions to stars like Alex Rodriguez, Mark Teixeira, and CC Sabathia that extended well past their prime years.

According to this line of thinking, even if Cano can generate seven more wins than the average replacement during his prime, he'll be worth much less in his late 30s. Because Brian Cashman had a mandate to reduce the 2014 team payroll to less than $189 million, if possible, passing on Cano seemed like a reasonable cost-cutting move.

That's not what really happened
However, the Yankees didn't dump Cano to get below the $189 million mark. On the same day that Cano signed with the Mariners, the Yankees signed Carlos Beltran to a three-year, $45 million deal. Shortly thereafter, they signed Brian Roberts to a one-year deal for $2 million to replace Cano at second base. During the summer, the Yankees traded for Stephen Drew and dumped Roberts.

Between Beltran, Roberts, and Drew, the Yankees shelled out more than $20 million this year. For less than $4 million extra, the Yankees could have kept Cano! If the Yankees were worried about overspending for declining players, why did they spend $17 million on a pair of 36-year-olds -- Beltran and Roberts -- to replace Cano?

Brian Cashman signed Cardinals outfielder Carlos Beltran to replace Cano's offensive production. Photo: Flickr user kathryn.

The Yankees' actions make it seem like their real goal was to bet on a bunch of out-of-favor veterans in the hope that one or more would have a big comeback year. Even though the Yankees didn't save much money in total, if each player they signed instead of Cano contributed a few wins, the team would have been better off.

It didn't work out
Needless to say, the Yankees' replacements for Robinson Cano weren't nearly as good as the real thing. While Cano was worth 6.4 wins above replacement this year, just below his recent average, Beltran's WAR was a hideous -0.2. Drew's WAR was an even worse -0.6 during his time with the Yankees, while Roberts' WAR rating was 1.5.

In total, the players hired to replace Cano in one way or another added, at most, one win compared to the average prospect or journeyman the Yankees could have signed. Swapping out Cano for Beltran, Roberts, and Drew cost the Yankees five or six wins.

In a cruel twist of fate, the Yankees fell four wins short of making the playoffs. The WAR figures suggests that the Yankees probably would have made the playoffs this year with Cano. This would have given retiring New York Yankees captain Derek Jeter a shot at one more World Series title.

This was foreseeable
As the saying goes, hindsight is 20/20. Yet the folly of spending money on declining veterans, rather than a superstar in his prime, was obvious beforehand. For example, WAR statistics show that Beltran has been on a steady decline since at least 2011.

Carlos Beltran, Wins Above Replacement

Source: ESPN. 

Roberts' decline has been even longer in the making, while Drew had posted dreadful offensive numbers in 39 games with the Red Sox in 2014. The Yankees should have known that the players they signed were cheaper than Robinson Cano for a good reason.

This is a common investing mistake
Many investors make the same mistake that the Yankees made this year. It's tempting to look for stocks that have fallen on hard times and now appear "cheap" by conventional metrics, hoping they will regain their former glory.

For every turnaround success story like Apple, there's a BlackBerry. Photo: Brandon Daniel via Wikimedia Commons.

The problem is that it's hard to predict one of these big comebacks in advance. Apple fell from about $100 in 1999 to $7 in 2002 before rocketing to $700 by 2012. However, for every Apple, there's a BlackBerry, which fell from about $145 to single-digit territory by late 2012 and is going nowhere fast.

Great companies are often expensive to invest in, but they are usually worth every penny. Just as the top baseball superstars consistently win games for their teams, great companies reliably grow revenue and earnings over time, producing great results for long-term investors.

The bottom line: Whether in baseball or investing, you don't pick an aging Carlos Beltran over a bona fide superstar in the prime of his career like Robinson Cano -- even if it could save you a few bucks in the short run. This mistake may have cost Derek Jeter his last chance to play October baseball. Don't let it cost you a comfortable retirement.