Adam Dunn was an intimidating Major League Baseball player. At 6’6″, 285 pounds, and nicknamed “Big Donkey” he could hit a ball a country mile. He wasn’t much of a contact hitter, leading the league in strikeouts on 4 different occasions and ranking 3rd all time in career strikeouts (out of 18,000+ all time MLB players). Despite his strikeout woes, he ranks 37th all time in career home runs (462) and 11th all time in at bats per home run (14.90). We’ll say he was pretty much an all or nothing type of hitter. Dunn once stated that “when I’m on a bad streak, I’m the worst player in the league”.
What’s interesting about Adam Dunn is how abysmal he was against left handed pitchers. Against right handed pitchers he was a superstar, but against left handed pitchers he looked like me out there.
In the 2011 season while playing for the Chicago White Sox, Dunn batted .064 against left handed pitchers in 94 at bats. Yes that means he only had 6 hits in 94 at bats against left handers. While this was by far his worst season against left handed pitching, he consistently performed as a below average player against left handers throughout his career.
Clayton Kershaw is one of the best left handed pitchers that ever lived, and has been carving up Major League hitters since he was 20 years old. In his career so far, he has won three Cy Young awards, and finished second on two other occasions. He has led the league in strikeouts on three occasions, and earned run average four different times.
While Kershaw dominates hitters of all types, he is particularly filthy to left handed hitters. Throughout his career Kershaw has faced a left handed batter 2,050 times and they are batting only .194 against him (which is about 50 points below the leaguewide batting average).
Knowing what we know about Dunn and Kershaw, one can only assume Kershaw dominated Dunn when they went head to head throughout the years. Hypothetically, if you were a baseball manager and you could pick any pitcher in the world to face Adam Dunn, you’d probably pick Clayton Kershaw. Dunn struggled mightily against left handed pitchers, while Kershaw ate left handed hitters for lunch.
Had Kershaw actually dominated Dunn, this would make for another boring blog by Meredith Wealth Planning. So I have good news!
Adam Dunn faced Clayton Kershaw 13 times in his career. He was 8 for 13 with 2 doubles and 4 homeruns, batting .615 (for reference, the highest single season batting average since 1941 was .394). Dunn might as well have batted with a toothpick against most lefties, but against one of the best left handed pitchers ever he turned into a mutant combination of Barry Bonds and Babe Ruth.
Results like this would surely send the Moneyball fanatics heads spinning.
Adam Dunn had 2,027 at bats against left handed pitchers throughout his career, but only 13 were against Clayton Kershaw. One does not need a regression analysis to determine his success against Kershaw is probably not statistically significant. But it did happen.
What we’ll never really know is if this success is explained by pure randomness (AKA luck) or if there is some other factor at play here. Can Dunn see the ball leave Kershaw’s hand better for some reason? Is there a psychological advantage of some sort? If Dunn faced Kershaw 2,000 times would we see the results we originally expected? None of that we will ever know.
What we do know is that small sample sizes can produce results wildly different than what we would anticipate over large sample sizes.
The evidence is clear, value stocks have outperformed both the broad market and growth stocks historically. This hasn’t just been a phenomenon in US stocks. The 2013 study from Clifford Asness, Tobias Moskowitz, and Lasse Pedersen titled “Value and Momentum Everywhere” examined the value factor across 18 developed market countries and found a significant return premium to value in every stock market with the strongest performance in Japan.
Unfortunately this does not mean every value stock will outperform the market, and does not mean every value stock will beat every growth stock. It also does not mean a large collection of value stocks (such as an ETF or mutual fund) will outperform every month, year, or decade. Much like we expected Clayton Kershaw to make easy work of Adam Dunn, there are always anomalies. There are many Adam Dunn type examples in growth stocks (think Tesla or Amazon).
There is an expected premium from value stocks for various reasons, and it has shown up historically over the majority of 5 and 10 year periods (Source: Dimensional Fund Advisors):
If we look at the distribution of outcomes for a 10 year buy and hold period of small cap value stocks versus small cap growth stocks, we can see below that there are more extreme winners and less extreme losers in the value bucket. (source: Distribution of Individual Value/Growth Stocks).
While I think this chart is a good representation as to why one should not engage in stock picking activities, I will go a step further. Longboard Asset Management published a study covering the period 1983 – 2006 and found the following:
This is consistent with another study done by Hendrik Bessembinder that covered the period 1926 – 2015, and showed that only 42.1% of all stocks had a buy and hold return larger than that of riskless One Month US Treasury Bills.
We all expect a premium return for owning stocks, that should be higher than what we expect from a CD or Treasury Bond. But most stocks do not provide that premium return, and it’s quite difficult to find the needle in the haystack that will. Owning broadly diversified passive funds has shown to be a strategy that can lead to successful outcomes, if investors can remain disciplined through the bad times.
That being said, any given stock can go to zero or provide less than desirable results. Kershaw did not meet the expectations we had while facing Dunn, but it may have reverted to the mean if we had been able to increase the sample size. How can we increase the sample size of our portfolio to help ensure our expectations are met?
Proper implementation is pertinent. Too much “tinkering” can be harmful. Unfortunately in my many years of watching baseball I often wondered why managers often made such important decisions based on very small sample sizes. As investors we have an edge that a baseball manager does not (as the need for immediate results do not allow it), patience.
Disclosure: Past performance does not predict future results. This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
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