The art of selling low

Now that the baseball season has passed June 1, roughly a third of the season is over. It’s high trading season, and some fantasy teams are beginning to consider that the investment they made during draft time on a particular player doesn’t necessarily equate to that player’s true value.

For example, to get Francisco Liriano in a draft, someone would have had to invest a sixth or seventh round pick in a 12-team league. The Twins pitcher has slumped this season so far — but hey, pitchers are prone to bad luck for good stretches of time. Unfortunately, Liriano sports a 5.04 FIP and a 4.96 xERA, which tells us that although Liriano may be a bit unlucky, a pot of gold doesn’t look likely around the bend.

Some owners will stubbornly wait until the Minnesota Lake freezes over to see if Liriano can pull it together—the 2008 season offers a bit of hope—while others may open themselves to recouping at least some of the investment by trading him.

Fantasy experts love to tell their followers which players they should buy low, but much more problematic are the candidates to be sold low. And even when pundits finally find it within themselves to hum a few notes of requiem on a former superstar—David Ortiz is done!—you may as well be given a shovel to dig the grave.

Let’s not give up so easily: Selling low is tough, but it’s not impossible.

In my experience, most teams will pull the trigger on a trade if they see three things in a player being offered.

First, brand quality. They are being offered a player who has a reputation for being solid and consistent for a long period of time.

Second, recent performance. They are being offered a player who has flourished in recent weeks, signaling no hidden risk.

Third, fills a need. They are being offered a player who will surely help them out.

Unfortunately, any holder of a troubled asset has only brand quality to market. David Ortiz and Francisco Liriano have track records of success in the majors. Just not recent ones. And most teams will make trades out of need—not out of speculation that a struggling player will rebound and help them out down the line.

But there are always exceptions.

Not every team has the same tolerance for risk. Some teams are struggling in the standings. Some are doing well. Some teams have deep benches. Others have ones that are already stacked with disappointing upside gambles. Figuring out a potential trading partner’s capacity for making a gamble is part of the due diligence that’s necessary for getting decent return on a player whose stock has sunk.

Also, all teams have troubled assets. Not all players are disappointing for the same reasons, though. Some are serving 50-game steroids suspensions. Others are on the disabled list. And then there are the players who only seem like disappointments, but are merely getting unlucky. All good targets.

Finally, it always helps to be creative in deal-making. Perhaps selling a struggling, high-risk player on his own merits little interest. What if the player is packaged with a high-performing player? In investment, this is often called securitization, where assets are pooled together and repackaged in a way where the risk/upside ratio becomes acceptable and attractive to a buyer.

Yes, it’s always best to buy low and sell high. Everyone wants to do that these days. But figuring out a way to get some return from high investments that have depreciated in value should not be ignored as an important component of success.