This is a guest post from Sean Carrigan. Sean does a fantastic job of associating value-based drafting to value investments. Conceptually they are very similar and the same techniques can be applied to both. Fantastic read!
As the last week of fantasy football drafts is upon us, I am offering up a unique look at drafting based upon criteria that is a little outside the box. My hypothesis is that fantasy football analysts and participants have very short memories when it comes to players and tend to overreact based upon the most recent season. This is not much different than what occurs in the world of investments. I know that sounds like an absurd comparison, but hear me out on this. In value investing there is a concept called intrinsic value. The basic premise is that given a stock (or other security) there is a value that can be calculated which should show the fundamental value of the company. While the market value is always changing, the fundamental value remains more constant. The comparison of the two values allows value investors to determine if a stock is overvalued, undervalued, or relatively fairly priced. What we commonly see is markets and investors over reacting to news and pushing the security's market price further in a certain direction then they really should. For instance, say company XYZ reports its quarterly earnings and it misses its projected number by a marginal amount. XYZ is still growing at a great rate and has excellent future prospects, but the market doesn't care about that, investors and fund managers wanted to see the company beat the projected earnings. There is heavy selling and the stock decreases in value by 10% in one day. In this case while the intrinsic value of the company remains relatively unchanged, the market value has significantly declined. This is the type of situation in which value investors see opportunity. People have forgotten all about what makes XZY a great company to buy in the first place and reacted emotionally rather than logically. The same is true for fantasy football. People react based on the latest thing to happen, not necessarily the entire situation. Each year we see fantasy football rankings and, more often than not, those rankings are HEAVILY biased on previous year performance. Obviously the intrinsic value of a player is going to be much more difficult than a company's to calculate since the fundamentals of his situation are constantly changing, but the premise remains.
Let me use an example: Matt Forte. In 2008 Matt Forte was an absolute stud. Using a standard scoring system he put up 243 points. When the 2009 rankings came out Forte was regularly ranked in the top 5 overall. The 2009 season was a bust for Forte, scoring only 164 points. In 2010 the ESPN rankings put Forte as the 21st-ranked running back on the list. In 2010 I drafted him in the 3rd round. My thought process was that although Forte might not score 243 points, he probably wouldn't score as low as 164. More realistically his intrinsic value lies somewhere between the two. I mean how could a guy who was regularly ranked in the top 5 drop off the list all together? He hadn't fundamentally changed. I was right and he scored 215 points that year. Right between his previous 2 seasons as I had predicted. One issue you run into using this method is that with injuries, players fundamentals DO change. And they get older. You need to make sure that their deviation from the mean isn't due to a fundamental change in their ability. If you are diligent at evaluating these fluctuations, there are some real value picks out there. The way I try and look for players matching this criterion is to search for a serious fluctuation from previous performance. The way I evaluate that is by taking the average of the players last 3 seasons and then subtracting the points they scored in 2011. When a player has a large number (unless he was injured), it's clear that he deviated negatively from his normal performance and due to that is most likely undervalued. Let's look at a few of the charts:
Now a large positive number shown is not going to necessarily give you a good draft candidate but it is certainly a good place to start. This year is especially tough because of injuries, but I like a guy like Jay Cutler. His numbers are off because he broke his thumb, but even if he had finished the season it would have been sub-par for him. But who was he throwing the ball to? When he was paired with Brandon Marshall in 2008 he was a top 3 fantasy QB. I don't think he will be there again, but I would be willing to bet he will be higher than he is ranked – currently between #13 and #15 on most sites. I wouldn't want to count on him as my starting quarter back, but talk about a backup with a LOT of upside. Matt Schaub is another good value pick. He was a top 3 QB in 2009 and has some amazing ball catchers. Granted they will be running the ball much more now, he is certainly better than his ranking between 10-15.
Chris Johnson was the #1 guy I was looking at this year but he has had such a good preseason he isn't really undervalued anymore. Jamal Charles is a guy who people are hating on after his injury last year. Keep him in mind and know that he was a top 5 pick one year ago. We have seen a lot of guys come back very strong from ACL reconstructive surgeries.
Love DeSean Jackson this year. The guy is so naturally talented and he is coming off a weak year. People have him listed outside of the top 20! I wouldn't want him as my first wide receiver but I am sure he will finish this season in the top 20. He could realistically be a top 10 or even a top 5 guy.
This is not a strategy that should shape your entire draft. BUT...If you keep your head on a swivel you can certainly find some diamonds in the rough. Don't just react to what happened last year. That's emotional. That's amateur. And you are no amateur. Now get out there and win.
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