[Today we’ll cruise into the weekend with a lighter article from staff writer, Kosmo. It’s spring training and a good time to turn your attention to baseball. That is unless you are a Red Sox fan like myself. Then the news about David Price seeing Dr. Andrews is a little like waking up in a Saw movie… though I haven’t seen any of those movies.]
In the past, I’ve written about a couple of baseball players who chose to hedge their bets financially – getting some immediate financial security in exchange for a lower ceiling on their earnings. Today, I revisit two of those players, Jon Singleton and Andrew Heaney, to see how things have turned out.
In June of 2014, I wrote an article about a new contract signed by Jon Singleton of the Astros. Singleton signed a deal that would guarantee $10 million over the next five season and had the potential to make as much as $32 million over eight years.
Pitcher Bud Norris, never one to show restraint, blasted the move:
“Sorry but this Singleton deal is terrible. Wish the [sic] Jon listened to the union and not his agent.”
The issue was that Singleton was giving up some upside in the deal. I estimated that he had the potential to earn as much as $65 million over eight years. I was personally in favor of the deal. Why? Because $10 million dollars, invested reasonably intelligently, should provide comfortable lifetime income.
Why was I worried about Singleton avoiding a worst-case scenario, rather than being concerned that he might be leaving $30 million dollars on the table? Mostly, because the worst case scenario sucks. If he washed out of baseball without the guaranteed money, it could mean forty years of manning the checkout counter of the local Qwik-e-Mart.
Top prospects fail in the Major Leagues with startling regularity, and Singleton wasn’t even an elite prospect. He was a good prospect, but definitely not considered a slam-dunk to succeed.
So, what happened?
Singleton flopped. In 2014, he played 95 games in the majors, and was horrible, hitting .168. In 2015, he played 19 games for Houston and hit .191. (If you don’t follow baseball, this is a very poor batting average). Singleton spent all of 2016 in the minors – and hit .202 in the minors. On November 20, 2016, the Astros removed him from their 40 man roster. Any of the remaining teams could have claimed Singleton on waivers at that point, but none did. None of the teams felt that Singleton’s upside was worth the remaining cost of his contract.
How much would Singleton have made if he had turned down the contract? He would have made roughly $700,000 in 2014-2016 and would be lucky to earn another $500,000 in 2017 and 2018 combined. That’s a far cry from the $10 million he’ll actually make. The clear financial winner so far is Singleton, and there’s really no scenario where the Astros win the deal. It probably won’t even make sense for them to exercise the “cheap” options on Singleton for the 2019-2021 seasons, because he simply won’t be worth the cost.
About a year ago, I wrote an article about Angels pitcher Andrew Heaney. Heaney had made news by agreeing to sell a 10% share of his future earnings to Fantex for $3.34 million.
At the time, Heaney was a decent, but not great, pitcher. I also noted the following risk:
There’s also the risk of injury. A third of major league pitchers have Tommy John surgery, which replaces the ulnar collateral ligament in the elbow. It’s a tremendously successful surgery that has extended the careers of a great many pitchers. Tremendously successful – some studies claims a 90% success rate – still means that sometimes it doesn’t work. 10% of the time, the pitcher never bounces back to pre-surgery form.
What happened? Heaney pitched six innings in 2016 and begin experiencing elbow discomfort. The Angels tried stem cell therapy as an alternative to surgery. However, this did not prove successful, and Heaney underwent Tommy John surgery in June. With a 12-18 month recovery time, he might be ready to return by the end of 2017 – but it’s just as likely he won’t pitch again until 2018.
Heaney will still accrue major league service time for the 2016 and 2017 seasons. However, when he hits arbitration after the 2017 season, he’s not likely to get much of a raise.
In my earlier article, I suggested that Heaney might have career earnings of between $50 and $150 million. The upside is probably a bit generous at this point, but it’s still quite possible that he exceeds the $50 million. Selling 10% of future earnings of $50 million for $3.34 million is pretty much a push, given the time/value of money. If he hits $100 million in earnings, the Fantex deal will end up costing him money.
But there’s still a big caveat. Not every pitcher bounces back from Tommy John surgery. There’s a small, but very real chance Heaney never pitches again. If that happens, the Fantex investors will get almost nothing for their $3.34 million investment.
While both of these hedging decisions appear to have been smart ones, this isn’t always the case. Many young players sign extensions that cap their earnings, and many would have been better off not signing the extensions. However, the stories of Singleton and Heaney highlight the negative situations that those playing are trying to hedge against. While it’s true you want to bet on yourself, it never hurts to hedge.
Editor’s Final thoughts
I think Kosmo hit it out of the ballpark here with the worst-case scenario. In my view, if you can lock yourself into being well into a “1 percenter” for life, it’s a very good deal… even if you have to give up being a “0.1 percenter.” This is especially true if the downside means going back to being a 50 percenter or worse.
This doesn’t just happen in baseball. Years ago Mark Cuban protected his Broadcom sale to Yahoo with a stock market hedge. It worked out beautifully for him.