I thought it might be prudent to share my fundamental approach to handicapping baseball before the season starts in hopes to provide some insight and hopefully help people with their approach.
In any form of investment one makes in their life, I strongly feel that the investment can not be justified without some degree of quantification that involves variables that have a direct effect on the investment itself (i.e. free cash flow analysis with stock valuation). The better the analyst (or handicapper) can quantify a given investment prospect, the better long term returns he should derive.
As for baseball, each year for over 15 years now, I have developed some sort of power rating system that entails all aspects in a baseball game that has importance, all weighted to what I deem the amount of influence they have on a particular game. Once all these variables are combined for both teams in a particular game, I find the disparity of the intrinsic value of both teams given. For all the games (nearly all) for 15 plus years, the wins and losses for each given disparity has been noted and plotted. Over the years, there have been structural and dynamic changes in the game itself that have effects on the variables used, so keeping the valuation process and ongoing and dynamic as possible is vital. To find the accuracy of the quantification process, their should be a linear relationship between the wining percentage and intrinsic value disparities (power ratings) of particular teams, and fortunately for my valuation process, any given 4 year time span there has been a perfectly linear relationship ( give or take a couple small basis points). For example, if teams that I have quantified to have a 40 intrinsic value has winning percentage of 53.5%, then an intrinsic value rating of 45 should have a winning percentage greater than 53.5% in the long run.
Some of the variables that I use in my valuation process for baseball are the following.
Starting pitching: A pitchers pitching performance is never the same, and his expected performance can be quantified to a certain degree, hence, his intrinsic value should not be the same every game. Things I look for in deciphering the intrinsic value of a pitcher on a given game is his current form, how his style of pitching matches up with the lineup he is up against, how his style of pitching matches up with the ball park he is up against, past history against batters in the expected lineup, how his style of pitching matches up with the strike zone of the umpire, if the pitching has a strong history of favoring home or a way, and several more fundamental variables that effect his expected outcome. Then there is a technical standpoint in the valuation of a pitcher as well, and that is his pitching chart. Does his past history show that he is due for a breakout, bounce back start, regression, or does his current chart resemble past charts that show he has the propensity to be a “falling knife” for long periods of time. All these factors are quantified and added are subtracted accordingly to the base intrinsic value of a particular pitcher
I have seen many fundamental models over the years, and one of the more common mistakes I have seen in a handicapper’s valuation process is the propensity to double count starting pitchers. This implies that they derive and intrinsic value for the entire team that includes the starting pitching, and then “double count” the starting pitching in the equation by adding the worth of a starting pitcher on a particular game, thus making their model obsolete.
Hitting: Deriving the intrinsic value of a teams hitting on a given game is quantified on a player by player basis. This intrinsic value of a hitter changes less than a starting pitchers on a game by game basis, does not factor in how he matches up against a starting pitcher (as that would be double counting as well, since that is done in the valuation of the starting pitcher). However, some of the variables that do effect the intrinsic value of a particular lineup on game by game basis is how well their hitting for is of late (on an aggregate level) how their style of play is correlated to the ballpark, whether they hit better at home or the road, “the umpire effect” (large strike zones diminish the worth of better lineups than less potent ones), and a few more variables. Note: the original intrinsic value is based on expected influential fundamental stats and then quantified into a power rating.
Bullpen: The intrinsic value of a bullpen is derived on a player by player basis that it based on key expected stats that are then quantified into a power rating. It is then weighted by the importance of each players role in the bullpen, and altered on a game by game basis based on key variables that effect the expected worth of a bullpen ( how much have the worked of late, how they match up against the opponents lineup) ect.
Then their exists other key variables that have less effect on the outcome of the game and are waited accordingly, such as weather, defense, managing, and other variables out of the realm of this write-up. Note: other key variables don’t take in account for streaks that are often accounted for by other fundamental cappers, as that would be “double counting” as well, as the aggregate change of intrinsic value of hitting and pitching change based on current form, and in my opinion is more accurately quantified rather than going by streaks (that are quantified as a whole and have the propensity to account for a pitcher that had an adverse effect on the streak itself. There are also a few other variables often used by fundamental cappers that are not accounted for due to double counting as well such as home field advantage that is quantified within the intrinsic value of each variable, which in my opinion gives a more direct worth of home field advantage on a team by team and game by game basis than a generic basis point deduction or addition.
There are also many fundamental cappers that rather than take the disparity of intrinsic values and then find the expected winning percentage based on thousands of past games with the same intrinsic value disparity, and then take that winning % and quantify it to a line (i.e. a home teams intrinsic value disparity of 62 over the last 5 years has a winning % of 60 (note an arbitrary example that prevents math). The intrinsic value of the home team would then be -150, and a market price (that accounts for vig) below that can be justified. Rather than use this approach, many other fundamental cappers use a basis point addition and subtraction approach in which the add basis points for a particular pitcher, basis points for home field, hitting and so forth. However, in my opinion, the basis point approach is more arbitrary and harder to quantify, although can reap very successful long term results when done correctly as well.
So that is how I derive a fundamental intrinsic value line. However, not mentioned is the regression analytics that accompany the valuation process (especially later in the season).
The name of the game in handicapping is coming out with a sharper line than the linesmakers, which is obtainable due to the expected supply and demand they have to account for in their valuation process, but has no effect on an outcome of a game. This fundamental approach allows one to grind out long term profits, and with proper money management can reap long term rewards.
Good luck this season.
In any form of investment one makes in their life, I strongly feel that the investment can not be justified without some degree of quantification that involves variables that have a direct effect on the investment itself (i.e. free cash flow analysis with stock valuation). The better the analyst (or handicapper) can quantify a given investment prospect, the better long term returns he should derive.
As for baseball, each year for over 15 years now, I have developed some sort of power rating system that entails all aspects in a baseball game that has importance, all weighted to what I deem the amount of influence they have on a particular game. Once all these variables are combined for both teams in a particular game, I find the disparity of the intrinsic value of both teams given. For all the games (nearly all) for 15 plus years, the wins and losses for each given disparity has been noted and plotted. Over the years, there have been structural and dynamic changes in the game itself that have effects on the variables used, so keeping the valuation process and ongoing and dynamic as possible is vital. To find the accuracy of the quantification process, their should be a linear relationship between the wining percentage and intrinsic value disparities (power ratings) of particular teams, and fortunately for my valuation process, any given 4 year time span there has been a perfectly linear relationship ( give or take a couple small basis points). For example, if teams that I have quantified to have a 40 intrinsic value has winning percentage of 53.5%, then an intrinsic value rating of 45 should have a winning percentage greater than 53.5% in the long run.
Some of the variables that I use in my valuation process for baseball are the following.
Starting pitching: A pitchers pitching performance is never the same, and his expected performance can be quantified to a certain degree, hence, his intrinsic value should not be the same every game. Things I look for in deciphering the intrinsic value of a pitcher on a given game is his current form, how his style of pitching matches up with the lineup he is up against, how his style of pitching matches up with the ball park he is up against, past history against batters in the expected lineup, how his style of pitching matches up with the strike zone of the umpire, if the pitching has a strong history of favoring home or a way, and several more fundamental variables that effect his expected outcome. Then there is a technical standpoint in the valuation of a pitcher as well, and that is his pitching chart. Does his past history show that he is due for a breakout, bounce back start, regression, or does his current chart resemble past charts that show he has the propensity to be a “falling knife” for long periods of time. All these factors are quantified and added are subtracted accordingly to the base intrinsic value of a particular pitcher
I have seen many fundamental models over the years, and one of the more common mistakes I have seen in a handicapper’s valuation process is the propensity to double count starting pitchers. This implies that they derive and intrinsic value for the entire team that includes the starting pitching, and then “double count” the starting pitching in the equation by adding the worth of a starting pitcher on a particular game, thus making their model obsolete.
Hitting: Deriving the intrinsic value of a teams hitting on a given game is quantified on a player by player basis. This intrinsic value of a hitter changes less than a starting pitchers on a game by game basis, does not factor in how he matches up against a starting pitcher (as that would be double counting as well, since that is done in the valuation of the starting pitcher). However, some of the variables that do effect the intrinsic value of a particular lineup on game by game basis is how well their hitting for is of late (on an aggregate level) how their style of play is correlated to the ballpark, whether they hit better at home or the road, “the umpire effect” (large strike zones diminish the worth of better lineups than less potent ones), and a few more variables. Note: the original intrinsic value is based on expected influential fundamental stats and then quantified into a power rating.
Bullpen: The intrinsic value of a bullpen is derived on a player by player basis that it based on key expected stats that are then quantified into a power rating. It is then weighted by the importance of each players role in the bullpen, and altered on a game by game basis based on key variables that effect the expected worth of a bullpen ( how much have the worked of late, how they match up against the opponents lineup) ect.
Then their exists other key variables that have less effect on the outcome of the game and are waited accordingly, such as weather, defense, managing, and other variables out of the realm of this write-up. Note: other key variables don’t take in account for streaks that are often accounted for by other fundamental cappers, as that would be “double counting” as well, as the aggregate change of intrinsic value of hitting and pitching change based on current form, and in my opinion is more accurately quantified rather than going by streaks (that are quantified as a whole and have the propensity to account for a pitcher that had an adverse effect on the streak itself. There are also a few other variables often used by fundamental cappers that are not accounted for due to double counting as well such as home field advantage that is quantified within the intrinsic value of each variable, which in my opinion gives a more direct worth of home field advantage on a team by team and game by game basis than a generic basis point deduction or addition.
There are also many fundamental cappers that rather than take the disparity of intrinsic values and then find the expected winning percentage based on thousands of past games with the same intrinsic value disparity, and then take that winning % and quantify it to a line (i.e. a home teams intrinsic value disparity of 62 over the last 5 years has a winning % of 60 (note an arbitrary example that prevents math). The intrinsic value of the home team would then be -150, and a market price (that accounts for vig) below that can be justified. Rather than use this approach, many other fundamental cappers use a basis point addition and subtraction approach in which the add basis points for a particular pitcher, basis points for home field, hitting and so forth. However, in my opinion, the basis point approach is more arbitrary and harder to quantify, although can reap very successful long term results when done correctly as well.
So that is how I derive a fundamental intrinsic value line. However, not mentioned is the regression analytics that accompany the valuation process (especially later in the season).
The name of the game in handicapping is coming out with a sharper line than the linesmakers, which is obtainable due to the expected supply and demand they have to account for in their valuation process, but has no effect on an outcome of a game. This fundamental approach allows one to grind out long term profits, and with proper money management can reap long term rewards.
Good luck this season.
