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Here comes a boring finance lesson again. In investingthere is a term called "specific risk." It is a straightforward term. You could invest all of your money in one single stock, bringing to mind the metaphor of "putting all your eggs in one basket." That is a specific risk. The downside is obvious - all of your eggs are in one freaking basket. However the upside of a single security is usually greater than the upside of the whole market. In bull markets, individual equities generally outperform the market as a whole. When you are buying a basket of stocks, you could have five stocks go up 20% but then also have five stocks go down 20%. With specification of risk you are either capturing all that upside or all that downside since there is no inherent hedge that a basket of stocks would provide in diversification.
There is not quite an opposite of specific risk. Diversification helps you hedge but you are also investing in usually multiple asset classes. The closest thing might be systematic risk. Systematic risk is the idea that no matter your investment, you cannot avoid the risk/loss. The market is considered "undiversifiable." No matter how many different stocks, options, or bonds you invest in, you cannot escape the systemic risk (except for perhaps money markets which, in baseball terms would be like not fielding a team).
On Friday afternoon the Royals signed Mike Minor to a two-year deal with a mutual option for a third year. Minor is coming off a torn labrum and shoulder surgery. Minor hasn't pitched since late-September of 2014, the worst season of his career. In this scenario, Mike Minor is specific risk and all pitchers are systemic risk. Now it is an exaggeration that the Royals put all their eggs in one basket but they did put a lot of eggs in that basket.
Shoulder surgeries are not as common as elbow surgery (Tommy John surgery) but they are more severe. MLB.com suggest that 70-80% of pitchers who have Tommy John return to their previous level of performances. It is a much more "routine" surgery (as much as surgery can be) and has become more common with each year. Recovery from shoulder surgeries? Not so easy.
In 2004 while writing for Slate, "Injury Expert" Will Carroll found that just 3% of pitchers he looked at who had labrum tears returned to pitching at their previous levels. In 2012 Jay Jaffe of Baseball Prospectus wrote about pitchers with labrum repairs and found that only nine of the 67 he looked at returned to some level of prior success. Those return rates are not too encouraging, especially in comparison to Tommy John surgery, a procedure that is typically thought of as being the most fearful of all in baseball.
I did a little bit of research of my own, looking to cover pitchers after Jaffe's 2012 study. So using our own Jeff Zimmerman's disabled list database, I looked at pitchers suffering some sort of shoulder injury from 2012-2014. I wanted to expand my scope a bit more than perhaps what Carroll and Jaffe did. Rather than just look at pitchers who had surgery, I looked at pitchers who also missed significant time due to a shoulder injury. Not always does the team doctor recommend surgery for shoulder injuries. Many times they think the player will be fine with rest or some sort of non-surgical rehab. I defined significant time as missing ~100 games. There was no exact threshold and for pitchers in the upper boundaries of 80-90 games I researched them a bit further to see what the issue was (sometimes it was actually surgery despite not being labeled in the database as such).
There are of course some caveats to the data. I promise I did my best to verify that they either had surgery or missed that significant time. There is a pretty good chance I missed a few players who had surgery, but I was at the whim of the data I had to work with.
Below are 44 instances (of 43 players - Michael Pineda is a two-time victim) of my criteria. Listed are their pre-surgery/injury Fieldingn Independent Pitching (FIP) and post-surgery/injury FIP differences. I chose FIP over ERA as I was looking to focus on the player's actual skill when he returned and not include any defense. Meanwhile I chose FIP over WAR because many of the players below did not even return or if they did they only pitched a handful of innings.
For the pre- and post-surgery/injury seasons I tried to find a season with a decent enough amount of data. Sometimes pre-surgery/injury a pitcher would have just 25-30 innings pitched, but if they had 100 innings in the season prior to that, that is what I used. For post-injury/surgery I sometimes had only a handful of innings, if any at all. I used my discretion on whether to just N/A the data (which means they didn't pitch for an MLB team again) or use the season. However any candidates who fell under that discretion probably didn't matter since they were either bad or out of baseball.
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On the above chart the left side of the chart represents a positive return or his FIP that got lower. The more to the right you go, the worse the FIP difference (it got higher). As you can tell the most populated bucket is the group of pitchers who never pitched for a MLB team again, or only had a handful of innings. Of the population of 44 incidents, 66% of the pitchers selected never returned to meaningful innings again (note that 2014 surgeries may still come back but did not in 2015), and 72% either had their FIP increase by 1.00+ or didn't pitch again.
Now of course age plays a part in successful returns. Younger pitchers recover from injuries more smoothly than older pitchers/humans. Mike Minor had his surgery at age 27 so let's just focus on players in that general age range.
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With the above age range we almost have the exact same distribution of did not pitch (60% this time), however the graph does lean a bit more to the left. Let's examine those cases.
Dillon Gee - Gee did undergo surgery to fix artery damage in his shoulder and came back to pitch 199 innings (almost double the amount of his surgery season) with a slightly higher FIP.
Jaime Garcia - Garcia is a walking surgical book. He's had rotator cuff surgery, Tommy John surgery, and thoracic outlet surgery. I wouldn't be surprised if he could perform surgeries himself. He followed up his 2013 injury season with a brief 2014 season in which he pitched 43 innings of similar results.
Jhoulys Chacin - Chacin had his miserable 2014 season cut short by doctor mandated rest instead of surgery. He followed 2014 up with an even shorter 2015, pitching only 26 innings. However those 26 innings came for a different team (Arizona) and didn't happen until September. The Diamondbacks then outrighted Chacin and he signed a minor league deal with the Braves this past December.
John Danks - Danks seems like he's been around since Barry Bonds started juicing but then you realize he's younger than Luke Hochevar, Tim Lincecum, Clint Robinson, Jarrod Dyson, Jeff Samardzija, and Cole Hamels (seriously). What has aged though is his left arm that he has suffered with a torn shoulder capsule, rotator cuff and bicep debridement, forearm strain, and circulatory issues. Danks pitched a strong 170 innings before his shoulder surgery that caused him to miss almost all of 2012 and part of 2013 as well. Upon returning though his FIP was more than a full run higher.
Sergio Santos - Finally we have a reliever to talk about. Santos was a very good reliever in 2011 before landing on the disabled list in May of 2012 and ultimately conceding to shoulder surgery in July. Santos was ready to go by spring training but just five games into the season his elbow acted up and he landed back on the disabled list. He stayed sidelined until August but in the 25 innings he did pitch he was pretty good.
The Royals cannot diversify risk entirely when it comes to pitchers, no team can. As long as we have baseball and human pitchers, we will have shoulder, elbow, and forearm injuries. Some might even say that it is inevitable with every pitcher. There likely is not a pitcher who hasn't been injured at some point in his career, even if it was a minor injury.
So the question is what are the risks the Royals are facing with investing $7.25M into the left shoulder of Mike Minor, and how can they lower that risk? The best way to diversify risk is to spread your investment across different securities. If you like telecom stocks, you don't just buy Verizon. You get AT&T, T-Mobile, Sprint, or others too (though maybe not Sprint...). Better yet, buy different sectors, not just one. However that analogy doesn't really apply. You can't buy second basemen to pitch.
The Royals still could diversify their investment. Instead of spending $7.25M on one pitcher with serious issues and risk, they could have spread out their money across different pitchers. What's the upside on Mike Minor? I ask because I seriously don't even know how to evaluate him. Yes he was a good pitcher in the at least recent enough past as he put up 3 wins in 2013...but so did John Danks.
Here is John Danks seasons:
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Danks was an all-star caliber pitcher and a near ace. From 2008-2011, here is where Danks ranked in his age range:
He was not that close to Tim Lincecum (remember how good he used to be!) but he was not that far from Zack Greinke and Felix Hernandez and Greinke and Hernandez won Cy Youngs in this time span.
Danks stumbled in 2009 but there are seasons that he was as good or better as Greinke during this stretch.
Yet despite his success, after his shoulder surgery he put up three straight replacement level seasons with a 5+ FIP and a near 5 ERA. Danks might be the best pitcher to have shoulder surgery in the past 10-15 years (not counting 35 year old Pedro Martinez) and even he couldn't quite bounce back from the injury. Really, you could argue he did not even bounce back, he struggled to put up any value at all over 400 innings.
So if the extremely good John Danks can't recover timely from surgery why do we expect the not nearly as good Mike Minor to do so? Danks suffered a capsular tear in his shoulder rather than a labrum tear (like Minor). Capsular tears are thought to be less severe than labrum tears. When Danks had his surgery White Sox coach Robin Ventura didn't seem too worried:
"Again, this is the part of the shoulder that they are not as worried about," Ventura said. "If it was labrum or something like that, that would be worse. It's good news. He's ready to go.
"He has your normal pitcher's stuff, but nothing that they felt they had to fix. I know he's pretty relieved as far as there was something there and they fixed it and he'll be able to pitch next year. He should be ready in Spring Training."
However Danks was not ready to go by Spring Training. He did not pitch in April either but made his 2013 debut in late-May. One strange thing with Danks' surgery is that capsular tears are a fairly rare diagnosis. At the time most orthopaedic surgeons wouldn't perform such a surgery and Danks reportedly had to consult several surgeons before he found one who would do the surgery. And remember that Danks injury was "less severe" than a labrum tear.
Back to my question on diversification, there seems to be a false upside or reward on Minor. I mentioned when he signed I would rather have spread that $7.25M around to five minor league free agents and try and hit the lottery with one of them than spend it all on one player. However the argument is "Minor has more upside than them" and I do not think that's correct necessarily. Pre-shoulder surgery Mike Minor might have had that upside, but does post-shoulder surgery Mike Minor?
Sometimes we can get obsessed with the upside, but what is the downside on Minor or a basket of minor league free agents? Minor's downside is he never throws a MLB pitch again and costs the Royals $7.25M. What's the probability of that downside? I think it is greater than you probably think given the studies above. 66% of the group I looked at never threw another meaningful inning after their shoulder injury/surgery, and 60% of similar aged players didn't either. The downside of a basket of minor league free agents is they don't pitch meaningful innings either but you've diversified your risk, and they are easy to cut with no financial commitment or roster spot.
So then what's the probability of one of those five minor league flyers being worthwhile? Still probably low, but is it as low as that 66% shoulder surgery/injury group? More so we don't have to guess the probability of them being good but instead the probability of them being better than Minor.
Truth be told...I don't know what the probability is of either, but I know that shoulder injuries can be a death knell for a lot of pitchers. There is no reason to think that bell won't ring for Minor either.