Draft Picks and Value Stocks

A hand holding a television remote control in front of a blurred screen showing an American football game in progress.

During the National Football League’s recent draft, teams selected from hundreds of prospects to build rosters for the future. It’s my favorite sporting event of the year, mainly because it provides an opportunity to see professional evaluators miss wildly with their projections.1 And while many sources of uncertainty contribute to these misses, NFL teams are often derailed by a self-inflicted error: focusing too much on a prospect’s weaknesses at the expense of all their strengths.

I was thinking about this lesson in the context of small cap value performance. Many investors have expressed concern over small cap value stocks underperforming large caps in the US over the 20 years ending in January. But this was largely an outlier from a global perspective. In major non-US markets, small cap value stocks handily outperformed their large cap counterparts over this period. While a two-decade stretch of underperformance is not what investors hope to see from US small value, it’s important to take notice of what went right for small value over this period.

Exhibit 1 20-year annualized return differences between small cap value stocks and large cap stocks

Alt text: A graphical representation showing the percentage growth or decline in various regions. The US shows -0.3%, Developed ex US at 2.7%, Europe at 2.1%, Asia Pacific at 2.9%, Canada at 2.5%, and Emerging Markets at 4.1%.

Past performance is not a guarantee of future results.

Source: Dimensional. Returns in USD. Sample period is February 1, 2004–January 31, 2024.

 See Appendix for the list of indices representing small cap value and large cap stocks in each country/region.

Table titled "Appendix" showing two columns: "Small Cap Value Index" and "Large Cap Index" next to a list of countries/regions including the US, Developed ex US, Emerging Markets, Europe, Pacific, and Canada. Each region lists corresponding indices like "Dimensional US Small Cap Value Index" and "S&P 500 Index" for the US. There's a footnote with copyright information stating "S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © 2024, all rights reserved."

 Thinking globally also reinforces the importance of diversification when emphasizing small cap value stocks. The returns for these stocks may not move in lockstep across regions, and outperformance for non-US stocks can mitigate the impact of disappointing relative returns in the US.

  1. 1. This is probably why I enjoy working in finance as well.

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About the Author Douglas Finley, MS, CPWA, CFP, AEP, CDFA

Douglas Finley, MS, CFP, AEP, CDFA founded Finley Wealth Advisors in February of 2006, as a Fiduciary Fee-Only Registered Investment Advisor, with the goal of creating a firm that eliminated the conflicts of interest inherent in the financial planner – advisor/client relationship. The firm specializes in wealth management for the middle-class millionaire.

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