Brian Cashman, general manager of the legendary New York Yankees for nearly 16 years, will be a featured speaker At Inside ETFs, the world’s largest ETF conference, to be held Feb. 10-Feb. 12 in Hollywood, Fla. Cashman recently spoke with IndexUniverse Editor-in-Chief Drew Voros about how the management techniques and tools he uses directing the Yankee’s baseball operation are similar to those used in business and investing.
IndexUniverse: As you know, Inside ETFs is a financial conference. We’ll have a lot of hedge-fund types, institutional investors and a lot of discussion about hedging. How does a Major League Baseball general manager like yourself hedge risk when it comes to not just high-priced players, but players in general?
Brian Cashman: The thought process incorporates communication and information as the most important aspects. The more accurate information that you can obtain and dissect, the better informed you’ll be to make safe bets, safe investments. My investments are into players. As an industry, we have seen a radical change. “Moneyball” is a term that people repeat too often—the movie and the book—but essentially we have gotten to the point with technology that we can measure everything that takes place on the field. We’ve hired some really smart people to educate us on what statistics are more meaningful than others. This allows you to make safer bets and manage the risk in a much smarter way than I think the old-school regimes used to do.
IU: So you have essentially an analytic process, right?
Cashman: Big time. I’ve been with the team here about 15 years now, and going on my 16th year, and I have changed over time as a department head. One of the changes I’ve made is to take the Yankees into the 21st century. When you see things in the industry improve and change, you’ve got to keep up with the challenges. We have created a quantitative analysis department and hired a director of quantitative analysis. That department has grown to some 14 people who manage a number of different information streams. Not only do they pool that information, but then it is dissected and produced in a meaningful way about what is truly taking place on the field in present performance and then future predictable performance. That has certainly allowed us to make safer, more informed decisions.
You’ll never be perfect or right all the time, but I think I’m in a much better position to make decisions and be comfortable with those decisions if they are educated-based.
IU: What are some of the advantages and disadvantages of having to manage the highest payroll in baseball?
Cashman: Well, the advantages … obviously, having the highest payroll means your ownership is fully committed. Being in the position to have the highest payroll means you can support that payroll. So it gives you full access to all pools of talent, but with that access comes exponential pressure to perform. A lot of times, payroll will not translate into performance, because ultimately, when you commit to long-term multiyear contracts, there is always a declining value of the player over the course of time, but the value of the contract stays the same or gets worse.
Sometimes you want to have the payroll that might be No. 1, but the production from individual players that make up a large percentage of that payroll will be in decline as they age, so most of the time it won’t match up. But with the highest payrolls come clearly a lot more pressure and a lot more publicity and a lot more expectations.
IU: In terms of management, talk a little bit about managing that on-field payroll. Describe how you work with your team manager in terms of the player rosters and the day-to-day lineup.
Cashman: I’m the head of baseball operations, so I set policy on the baseball side and I’ve hired the manager. In this case it’s Joe Girardi, and he is an extension of my philosophy. I hired someone that I knew thought along the same lines as I do. I acquire the players. I put the roster together, and then he takes that roster on the field. When I hire a player or replace a player, I define the role to Joe, such as, this guy is going to be our everyday center fielder, right fielder, first baseman, what have you. Then he executes. He does the lineups. I’ll make suggestions on lineups and we may disagree at times, but ultimately he puts forth the lineup and the construction of the lineup the way he sees it, but plays the players that clearly I have acquired and for the reasons I have acquired them.
He’s executing my philosophy and it’s the philosophy I was taught by [former Yankees General Manager] Gene Michael, a longtime baseball expert. We’re executing the Gene Michael playbook, which is very similar to the [former Baltimore Orioles General Manager] Earl Weaver playbook.
IU: How many times a day do you talk to Joe during the season?
Cashman: Oh, I talk to him all the time. It’s a nonstop, full-time communication. You have injuries, you have inferior performance, you have personality conflicts; there are a number of different things that take place over time. Plus, you’re constantly communicating with the public through our large media vehicle here in New York City, and because we’re covered by so many different media and the Internet, it has to be a constant. Communication is very key.
IU: Let’s stick with the building of your team in the same light as people tend to build investment portfolios or even organizations. Where do you tend in terms of baseball to be more conservative, say, in pitching, and where do you tend to be more aggressive? Or is it really a case-by-case scenario?
Cashman: It is at times case by case, but in a general setting, we’re very conservative. We have learned over time to be very conservative and cautious in acquiring pitching talent from Japan, for instance. It’s a different game there. The mounds are a different size. The pitching routines are different. They have two days off every week, where we don’t. And so the workload, and frankly everything, is completely different over there, even though you’re playing a very similar game of baseball. There are a lot of important differences and therefore the transition from Japan to the States is very volatile. So we have become very conservative in that market.
We’re very aggressive in team building. You want to be strong up the middle [of the field]. From the amateur world, you’re constantly looking for catching, shortstops and center fielders. Those are the guys that you try to find in the amateur world. You can usually translate those guys to get bigger and stronger. A lot of the backbone of your amateur talent base is going to be gravitating to the guys like that in the front end, and then you move from there.
IU: What is the key to identifying that new talent and then actually developing it?
Cashman: In the amateur pool, you have the domestic and international scouting departments, and like any business, you have to have a process, you have to teach that process, and then you have to hire people to execute the process. We do have profiles that we gravitate to. It’s a tool-based assessment on the amateur world. Then once you sign these players, eventually that’s where the quantitative analysis department comes in to conduct performance-based analysis. After a period of time of development, players can have all the tools they want, but they have to translate those tools into consistent success. And that’s what starts to separate the players as they move up the ladder. From AA [minor league ball] on up, performance scouting becomes more vital than the tool scouting for the situation.
IU: One of the things that we’ll hear a lot about in the financial world is value investing. Everybody wants to find that beaten-down investment that is going to pop for them. Similarly, you’ve had some success in the free-agent market finding that low-cost, high-return player, such as Eric Chavez last year. Anybody out there that you see that has that potential? I know the trading is hot and heavy right now, but can you identify anybody out there that you’re looking at?
Cashman: I can’t, because it’s slim pickings. This is a very low free agent market. However, I can identify players that have been signed that have great upside. They’re cheap players coming off of whether it’s a subpar year or injuries or what have you. The Chicago Cubs have signed a number of players that fit that idea. I think Nate Schierholtz, the right fielder they signed from the Phillies, is one example. I thought that was a nice coup for them. I thought their signing of free agent Scott Feldman from Texas is another. Texas didn’t pick up his option and Chicago scooped him up. These two players are good low-risk, low-financial investments with higher upside.
But in terms of what is available to us as we move forward, it’s been slim pickings. Sometimes you have some difficulty, especially if it’s a marketplace that is thin, like this winter. We were a 95-win team, and a lot of times, those players—if it’s a very slim market—want to gravitate to rosters that are a lot thinner than ours, and so we have difficulties at times securing those.
IU: Let’s talk a little bit about customer-retention management, which is of course important to every business and financial advisor. What is the biggest complaint your customers have about the Yankees, and what do you do to address that?
Chapman: Well, the pressure point is winning. George Steinbrenner set the bar so high: a world championship or nothing. We’ve had more success than any other baseball organization, but unless you’re delivering a World Series title on a yearly basis, the natives are restless. So, we had the best record in the American League last year, 95 wins, but we got knocked out in the American League Championship Series, four games short of a World Series appearance. And as I said, the saber-rattling takes place rather quickly.
IU: Can other teams, such as my hometown Pittsburgh Pirates, emulate the “Yankee way” or model, if you will, or does it simply come down to money?
Cashman: No, the markets are different. I think to emulate the Yankee model you have to be in a pretty significant market. I know the Red Sox have emulated the Yankee model, but there are some other teams such as the Philadelphia Phillies. I’m not sure what the difference between the city of Philadelphia and the city of Pittsburgh is, but Philadelphia is turning into a behemoth financial stronghold here in the National League East as well as in all of baseball with their contract commitments and their success. They built the new ballpark, had World Series appearances and won a recent World Series as well. As you may recall, we were able to beat them the second time when they were in the World Series here recently.
I do think that they have to take a different path, but I think there are a lot of organizations that have shown there are different ways to climb that mountain. Those franchises that have exceeded the expectations for the markets they are in, have maintained consistency and success for quite some time. For instance, in Minnesota’s [Twins] case, they have jumped classes, so to speak, if there were a lower class, a middle class and upper class. Maybe they went from the small class to the middle class. They’ve got a brand new ballpark and I’m sure revenue streams jumped because of it. That’s credit to their longstanding, consistent road to winning and consistency that they have stuck to.
Cashman (cont’d.): There are different ways to execute a baseball model, and ultimately the Yankees have, like many franchises, maybe an extra tool in the toolbox of consistency and utilizing the financial markets to their advantages because of the market we play in. But at the same time, a number of basic labor agreements have targeted the upper markets to reel them in and hold them back, and they have done that over the last number of years, and it’s been very successful.
For instance, there’s revenue sharing. There is the luxury-tax penalty if you’re over a certain amount of payroll. And it certainly has affected how we do business as well as others. So, I think [Commissioner] Bud Selig needs to be congratulated. He has equalized the playing field in many respects. It’s not totally perfect and it never can be, because obviously you have Toronto Blue Jays constraints dealing in Canada and the dollar, and their issues are different than maybe other clubs. But at the same time, I think everybody does have a real opportunity to compete and qualify for a championship ring.
IU: With investments, a lot of times people have the right idea, but either the investment doesn’t click and they run out of money, or they give up on the idea only to see two days later their idea actually succeed. In that similar vein, in terms of trading players or keeping players, is there a player you would care to speak to that maybe you traded too early and then you saw him blossom on another team? And conversely, is there a player that maybe you held onto too long?
Cashman: Mike Lowell is a player that has now since retired, but he was a New York Yankee well before he was a World Champion Marlin and then eventually a World Champion Red Sox. Mike Lowell was a third baseman at our Columbus Clipper minor-league affiliate. We won the World Series in ’98 with Scott Brosius as our third baseman, and he was a World Series MVP, so we signed Scott Brosius to a three-year contract, which kind of put the nail in Mike Lowell’s coffin with the Yankees at that time.
So we took the depth of that position of strength for us at third base in Mike Lowell and we traded him to the Marlins for three young starting pitchers that would shore up an area of weakness for this franchise. And Mike really turned into a heck of a player over the next 10 to 15 years after that and helped the Marlins to a World Series title. He eventually got traded to the Red Sox and helped them to two World Series titles. And he is one of the game’s quality people and great players. Scott Brosius was a fantastic thrust for our championship runs and he was a world champion I don’t know how many times over, three times over probably, but that was a player we traded too early or I traded too early.
Which player did I trade too late? There are probably a number of them that I could name, and I say “a number of them” because when it’s too late, you can’t trade them. So, especially with the investment that we have in our players, once one of these guys with a big contract goes on the wrong side of the mountain, then it’s kind of too late to trade them, because no one is going to want them.
Smart beta isn’t smarter than cap weighting, but it is different, and that’s great for investors.
Trial by fire is one way to discover why ETF transparency matters.
Most people now realize leveraged ETFs can hurt you, but how, then, to use them?
What would a shift out of a mutual fund and into an ETF look like up close?