Bonus: Long Live Value Investing?

Episode Summary

Executive Summary: The episode explores Charlie Munger’s idea that investors must rigorously challenge their strongest beliefs and be ready to abandon them quickly if evidence warrants. Jack and Justin use that framework to examine systematic value investing, concluding that while no strategy is certain, the long historical record, academic explanations, and lack of decisive evidence against it keep them bullish on value for the long term.

Main Topics: Munger’s “argue the other side” discipline (Priority: 5/5): The hosts discuss the importance of deeply understanding opposing arguments, not just holding memorized views, as a core part of sound investing and decision-making. Pre-mortems and devil’s-advocate thinking (Priority: 4/5): They describe tools used by investors and funds to stress-test ideas, including assigning someone to argue the bearish case and imagining how a strategy could fail in hindsight. How long it takes to disprove an investing idea (Priority: 4/5): The conversation emphasizes that investors rarely get statistical certainty within a career, so they must make judgments based on evidence rather than waiting forever for definitive proof. Why value investing still looks compelling (Priority: 5/5): Despite prolonged underperformance, the hosts argue value remains supported by a long history across regions, valuation methods, and time periods. Academic and behavioral explanations for value (Priority: 5/5): They cite the traditional explanations that value works because it is riskier and because expectations become too low, leading to eventual outperformance. Accepting uncertainty in any factor strategy (Priority: 4/5): Even with conviction in value, they stress that no investment thesis is 100% certain and that investors are always exposed to the risk that the strategy may fail.

Key Arguments: A strong opinion is only meaningful if you can articulate the opposing case better than your opponent can. Investors should not wait a decade to decide a strategy is broken; when evidence is strong enough, beliefs must be retired quickly. Value has an unusually long and broad historical record of working across countries, markets, valuation measures, and eras. Periods of prolonged value underperformance have happened before and later reversed, so recent weakness alone is not decisive evidence. The classic academic reasons for value—higher risk and behavioral overreaction/low expectations—have not been invalidated by the current period. Even a high-conviction view on value should be held probabilistically, not as an absolute certainty. Systematic value investing remains the best bet because the evidence against it is not strong enough to overturn the historical and theoretical case.

Data Points: Historical underperformance threshold for value: 15 years (example longest period discussed) - Used as a reference point for how long one might need to wait before questioning whether value has permanently failed. Illustrative extension beyond the longest period: 22.5 years - A rough calculation mentioned as 50% longer than a 15-year stretch, to show how difficult it is to prove a factor is dead. Estimated time needed to disprove a factor statistically: 80–85 years - Referenced from a prior piece by Hosting, suggesting very long horizons may be required before concluding a factor like value no longer works. Probability value outperforms: 90% - Justin frames his belief in value probabilistically, saying he may think value has around a 90% chance of outperforming over the next decade. Probability value does not outperform: 10% - He notes there remains a meaningful minority chance that the opposing arguments could prove correct.

Pivotal Quotes: "It's bad to have an opinion you're proud of if you can't state the arguments for the other side better than your opponent's." — Charlie Munger (quoted by the hosts): The central quote driving the episode’s discussion on intellectual humility and rigorous investment thinking. "You can't sit here and wait a decade to figure out whether value is really dead or not." — Justin Carboneau: Explaining why investors must act on evidence before definitive statistical proof arrives. "The case for value is still really strong." — Justin Carboneau: His bottom-line conclusion after stress-testing the value investing thesis.

Implications: Listeners are encouraged to stress-test their own theses, think probabilistically, and avoid both confirmation bias and premature abandonment of strategies. For value investors, the message is to stay disciplined, but remain alert to evidence that could justify changing course.