Shallow Thoughts & Nearsighted Observations

After going with focused and snark-free on Wednesday, I'm back with what everybody is more used-to from me.  Meandering and snark... it must be ST&NO.  Ready... BEGIN!!!!!

1.  In the holistic, all-things-considered sense, second-round draft picks consistently work out to have better value than first-round draft picks.  Some of you don't believe me, that much is clear; but it's true.  Today, I am going to explain why and how.

There are four key reasons why:

a.  Guaranteed money

b.  The urgency of right now

c.  Contract length

d.  Relative value returned

a.  First, let's start with guaranteed money.  If a player is picked in the first 16 picks, his team is allowed to sign that player to a six-year contract, and they usually do.  (The five-year deal Jake Long negotiated last year led a fairly anomalous preponderance of 5-year deals last season.)  Players picked in the last 16 picks of the first round can be signed for a maximum of 5 years, and almost always are.  All of them did in 2008.

Beginning with the first pick of the second round, you get into 4-year contract territory.  I know what you're thinking... what does the length of the contract have to do with the price of tea in China?  Well, a few things, actually.

A longer-term contract is inherently favorable to the team, because it provides cost certainty over a long period of time.  To reap some benefits in return for the opportunity cost which the player is bearing (as represented by the inability to renegotiate for a long time,) agents insist upon receiving a great deal of guaranteed money in longer contracts, which provides income certainty to the players.

 

Take a look at the following chart I put together to help illustrate this point.

 Contracts_2008_draft_medium

The bolded red rows represent the slots of the 5 players the Broncos took on Day 1 this season.  (Note that Kevin Smith was the first pick of the 3rd round last season, due to the Patriots' forfeiture of their own first round pick, hence the 3-year contract.)  Notice the far right column, which shows guaranteed money per year.  It steps progressively down with each pick, which is what you'd expect.  Look at the huge drop between the end of Round 1 and the beginning of Round 2.  (I didn't include pick #31 Kenny Phillips because he had a fairly exotic, incentive-laden contract, or pick #32 Phillip Merling, because his deal was negotiated as if he were the last pick of Round 1, like Pick 32 normally is.)

If you have a guy like Alphonso Smith rated as the 20th best player in the Draft, and you can get him at #37, it's a great deal financially.  Instead of having to guarantee $1.6 Million per year, you're getting the guy for guarantees of $650-700,000 per year.   Just because a guy was drafted in the second round, doesn't mean he can't play like a first-rounder.  Many of them do, at least as many as there are first-rounders who bust.

b.  There's also the urgency of right now.  For this reason alone, the standard going rate of a draft pick this year is ALWAYS a pick one round higher the next season, which, for valuation purposes is ALWAYS assumed will fall  dead in the middle of that one round.  That means that a first next year is fundamentally equivalent to the 48th pick this year.  The Broncos got the 37th pick for the equivalent of the 48th pick.  Value-wise, the Broncos win easily there, regardless of who the player selected is.

A lot of media people are acting like this was a really questionable or odd trade, but it was absolutely not.  It was standard, like any number of other trades in recent years, such as the ones for Tony Ugoh and Joe Staley.  The Panther did exactly the same thing in trading for Everette Brown at the 44th pick.  Somehow, they're taking much less of a media beating for it.

Josh McDaniels put it like this.  He said that the way they were looking at it, they had four 1st-rounders in the next two years.  When a player they valued as a #1 was available at #37, they decided to take three of the four #1s this year.  I think that makes perfect sense.  Three good players can help the team now, and for one of them, you got at a huge discount, in terms of dollar cost.  Would you rather pay $700K per year guaranteed to Alphonso Smith, or 2.5 to 3 times as much to next year's 16th pick?

c.  Contract length is a key also, as alluded to before.  Under the current collective bargaining agreement, (whose terms I mostly expect to continue into the foreseeable future once a new deal is reached,) a player on a 5- or 6-year contract hits unrestricted free agency after their rookie contract.  A second-rounder on a 4-year deal is a restricted free agent at the end of his.  That means that the team can control him cheaply for a fifth year too.  So say Alphonso Smith plays great and completes his 4-year deal, and earns $4.8 Million (assuming a 5 percent raise over Curtis Lofton's deal last season, which is probably reasonable).  The Broncos could tender him with a first- and third-round tender, which nobody will want to pay.  The cost, in today's dollars, would be an incremental $2.562 million, so let's say it's $3.27 Million five years from now.  (That number was extrapolated by running a 5% annual raise out 5 years, or mathematically, 2.562 X 1.055).

That brings the 5-year total to $8.07 Million, or $1.61 Million per year.  Compare that to the contract that CB Domonique Foxworth just signed with Baltimore.  He got $28 Million for four years, with $16.5 Million guaranteed.  Foxworth improved in Atlanta, and got to the level of a completely average player.  This is simple math, folks.  A better player can be had for a quarter of the price of a lesser player.  You take that deal every time.  It's exactly the reason that you want to build through the Draft.

d.  Time for more fun with charts, with a derivative of the above chart, this time projecting slot costs for players drafted in 2009.

2009_draft_cost_benefit_medium

We're making a couple of important assumptions here.

   i.  ESPN.com's Scouts Inc. knows what they're doing in valuing prospects, and their 1-100 grading scale is linear in nature, by which I mean, a one-point difference between 90 and 91 is the same as a one-point difference between 66 and 67 or 30 and 31.  Each unit must represent the same amount of value on a scale of 1 to 100.  (This entire assumption is somewhat dubious, but it's what we have to work with.)

  ii.  All slots will get a 5% raise this season, which again, is probably reasonable, if not slightly optimistic for the players, given the weak economy.

So, with those assumptions in mind, notice how little relative value you get out of the top 7 picks.  Compare that with how much relative value you get from lower picks. This indicates what I have been saying (and I am definitely not the first person to do so), that the second round is the sweet spot for value.

 

Our five Day One picks from this Draft will cost a total of about $9.5 million per year over the next 4-5 years, or about three-quarters of a million dollars less than Darrius Heyward-Bey, the second coming of Ashley Lelie.  That is value maximization.

2.  As for the MSM's incessant howling about Alphonso Smith being too short, people ought to read this excellent FanPost from gnarlybroncodude.  Now, I personally tend to be a guy who favors taller CBs, all things being equal, because I favor man-to-man press coverage.  (Hence my love-fest for Sean Smith).

Josh McDaniels made clear the other day that he favors shorter, more fluid CBs.  To paraphrase him, he said that the jump-ball situations where shorter guys are at a disadvantage happen too infrequently in a season to be very worried about, when compared to the quickness benefit you can get all the time.  I think that makes a good deal of sense, and in any case, Alphonso Smith was one of my Players I Love a few weeks before the Draft.  I value ball skills in a DB over any other factor.  I was, and am, thrilled with this pick.

3.  One of the fundamental rules of Finance is that sunk costs become irrelevant once they are incurred.  I just spent $2,000 getting the engine of my car fixed, because the #4 rod bearing failed due to a manufacturing defect, and I was past the power-train warranty by a year and 20,000 miles.  If something else major goes next year, the two grand I spent this weekend is not germane to next year's fix-or-junk decision.  It must be evaluated independently, because paying the two grand was judged to be the right call in the spring of 2009, and that's that.

By the same token, watching the Broncos record this season through the prism of the traded first-round pick is a waste of time, and an exercise for the unintelligent. It doesn't matter, because the decision was deemed to be the right one in the spring of 2009.  Sportswriters like to second-guess, and root for their instant "analysis" to have been correct.  I consider that to be pandering to (and encouraging) foolishness from the consumers of their content.

Think about it like this.  You're playing Texas Hold-em, and sitting on pocket aces, and after slow-playing it pre-flop, the flop comes out Ace, 7, 10, rainbow.  You go all-in with a set of Aces, heads-up against a guy with a bigger stack than you, who has King-8 of clubs.  The other guy catches running clubs on the turn and the river, for a flush, and you bust out.  Was going all-in a bad decision?  Of course it wasn't.  At the time you made the decision, it was clearly the right call, at more than 9-to-1 odds.  You go get a stiff drink and try again tomorrow, and do exactly the same thing the next time you're faced with the same situation.  The end.

By the way, if the naysayers are correct, and the Broncos' pick is in next year's top 10, I bet the Seahawks try like crazy to get out of it.  (Political messaging time.)  Top-10 picks provide extremely low relative value vis-a-vis the money you have to spend on them.  Remember when the Patriots had San Francisco's 7th choice in 2008, from the Joe Staley deal the year before?  They wanted OUT of that pick, and only could get down to #10, where they took Jerod Mayo.  They thought they could get him in the late teens, but couldn't find a taker for the 10th pick.

4.  I talk about pundits a lot, and there is always a negative connotation to that word when I use it.  The reason is that I associate the word with political talking heads, and I think that virtuall all of those people do society a great injustice by focusing on the wrong things.  In this time of 24-hour news cycles and instant analysis, the pundits focus on process and horse race, rather than on policies which affect people's lives down the line.  It's always "What does he have to do to get elected?" rather than "Are his policy proposals good for America?"  This is how tens of millions of Americans can get a tax cut without fully understanding that they got one, for example.  The media is more concerned with the politics than the policy.

I think football pundits do the same thing, especially around draft time.  They're more worried about the process of it all, than with how the results translate to the field.  Because they can read a value chart and a few scouting reports, they can pass themselves off as process experts.

Adam Schein can rip the Broncos for taking Knowshon Moreno, and it is (arguably) pertinent content today.  When Knowshon rushes for 1,500 yards this season and helps the Broncos win games, Schein's rant will be a distant memory, from many news-cycles past.  I remember when Schein brutally ripped the Packers for hiring Mike McCarthy.  Before I got rid of Sirius, he had him as a regular guest on his radio show, and Schein couldn't get enough of kissing up to "Michael J. McCarthy."

Rick "Mr. Puff-Piece" Reilly also goes the shrill route, and calls Josh McDaniels Boy Blunder, and claims that it's arrogant that McDaniels takes a different approach to draft board construction than "most boards."  He incorrectly states that McDaniels traded a #1 to "move up" in the second round.  He goes on to tell us, as Broncos fans, that we're screwed.  It seems to me that he ought to be posting on the DPO message board, with moral clarity like that, to go with such a weak grasp of the facts.

As a person who is strictly an opinion writer/analyst myself, I try to be careful to be measured and consider all sides, because being wrong always comes back on you when your work is archived.  I expect to be wrong sometimes, but I think that being reasonable in your original presentation, and making transparent acknowledgment of the fact that you could be wrong goes a long way.

5.  The flip side is that my opinions are completely independent of anybody else's, and not very subject to change at all.  In a forum like MHR, I am happy to read other people's opinions, and I think it's great that we can all discuss football, and share thoughts, and have our opinions evolve from the discourse.  If somebody wants to tell me that the Alphonso Smith trade was dumb, I'll never agree with that, no matter what they say, so there's no point in me arguing with them.  I think what I think, and they're free to think what they think.  That's what I mean when I say I am not in the arguing business, I am in the saying-what-I-think business.

I relate this to Josh McDaniels' comments about how he doesn't care what anybody else's evaluations were.  That's definitely the right attitude, in my opinion.  I am solely responsible for the content of this column, so the only things which matter to it are what and how I think.  When I spend 4-5 hours every Sunday writing it, I don't think for one second about how anybody else is going to take it.  I am solely focused on writing value-adding content that MHR readers will want to read.

Josh McDaniels and Brian Xanders are responsible for selecting the personnel for the Broncos, so the only things which matter to that process are what and how they think.  They have to produce a winning team, so their focus is solely on that.

Disagreement and criticism are fine, in both arenas, but at the end of the day, only results matter.  McDaniels and Xanders don't care, just like I don't care.  There's no room for hurt feelings, only for production and results.

6.  As the resident around-the-league guy, here is one undrafted Free Agent per team to watch out for this season, and two for the Broncos.

Team Player Position Comments                                                                         
Arizona Brandon Pearce T Could compete at a position where the Cardinals could use some depth.
Atlanta Ryan Stanchek T-G This is the kind of player who eventually steals a starting job
Baltimore Dannell Ellerbe ILB Flashed a lot of talent at Georgia, but never was consistent. 
Buffalo Joel Bell T I'm loving the O-Linemen so far, but Buffalo has a need at T.
Carolina Gerald Cadogan T Should have been drafted by the end of Round 4.
Chicago Eric Peterman WR Slot guy is the best of a weak bunch.
Cincinnati Quan Cosby WR A solid player who can contribute as a rookie.  Already 26 years old.
Cleveland Mike Massey TE The Browns need TE help.  Wonder if he'll cry about Wolverine hate?
Detroit DJ Boldin WR

Anquan's little brother could be better in the NFL than college.

Green Bay Ronald Talley DE Not impressed with this group, but Talley could help at DE.
Houston Jeremiah Johnson RB May be able to help soften Slaton's workload
Indianapolis Tim Masthay K May make the team as a kickoff specialist
Jacksonville Tyler Lorenzen QB A possible keeper as a #3 QB due to his good athleticism
Kansas City Taurus Johnson WR Has kick return potential
Miami Orion Martin DE A potential edge-rusher in a rotation, probably at OLB
Minnesota Ian Johnson RB Could make team as a backup RB
New England Brian Hoyer QB Developmental type with good tools
New Orleans PJ Hil RB It makes a lot of sense that he'd find short yardage carries
New York Jets J'Nathan Bullock TE Basketball star at Cleveland State was a football star in high school
New York Giants Maurice Evans DE Should have stayed in school.  Fell due to behavior questions
Oakland Shawn Bayes RS Speedster, so he'll fit right in
Philadelphia Sam Swank K NFL caliber placekicker.  This is a function of my dislike of David Akers
Pittsburgh Mike Reilly QB Ron Jaworski likes him, and that's good enough for me with a QB
San Diego Darry Beckwith ILB Underachieved at LSU, but has talent
San Francisco Alex Boone T Lakewood, OH's own, can someday start at G in the NFL. Fairly serious behavior concerns exist due to a predraft alcohol incident.
Seattle Michael Bennett DE Can play in a rotation at the NFL level
St. Louis Phil Trautwein T Can fill in at either T position, and do fine
Tampa Bay Rob Bruggeman C Will be in the mix for a backup OL spot
Tennessee Mitch King DT High motor, low tools.  Will probably make the team on effort.
Washington Antonio Dixon DT Has talent, but inconsistent play kept him undrafted
Denver Chris Baker NT This was buying low, and with such a need at NT, he has a great chance
Denver Rulon Davis DE When you were named after Rulon Jones, Denver is a natural fit.

 

7.  Retired for John Elway.

8.  It occurred to me the other day that there's a fine line between using recurring phrases like "Ready... BEGIN," or always keeping #7 retired for John Elway, and devolving into nothing but a bunch of Schein-on-the-radio-like schtick.  I plan to be careful not to ever get to Scheinland with my work for MHR.  Let me know if I am ever going too far in that direction, and I'll dial it back.

9.  Have a great week, and I'll see you next Monday morning for more Shallow Thoughts & Nearsighted Observations.

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