Radio Show: The Death of Value Investing | #59

Episode Summary

Executive Summary: Meb Faber and co-host Jeff discuss why popular investing styles cycle in and out of favor, arguing that value, smart beta, momentum, commodities, and passive/active debates are best viewed through long-term history, behavioral biases, and implementation discipline rather than recent performance. They stress common-sense backtesting, avoiding performance chasing, and recognizing that real wealth is usually built through concentrated ownership or entrepreneurship, while diversified portfolios mainly preserve wealth over time.

Main Topics: Style Cycles, Value Investing, and Mean Reversion: They debate claims that value investing is "dead," arguing that style underperformance is normal and often temporary. The discussion emphasizes factor rotations, crowding, and the possibility that value can recover even after long periods of lagging the market. Passive vs Active and Smart Beta: They react to Burton Malkiel's shift toward acknowledging active inefficiency exploitation and discuss smart beta, robo-advisors, and the tension between market-cap indexing and factor-based alternatives. The hosts are skeptical of marketing pivots but supportive of evidence-based improvements. Backtesting, Data Integrity, and Common Sense: A major theme is how to interpret backtests responsibly: historical context matters, survivorship bias and overfitting invalidate weak research, and large drawdowns are often larger than modeled. Backtests should inform judgment, not replace it. Momentum, Trend Following, and Behavioral Biases: They distinguish performance chasing from rules-based momentum/trend following, arguing that disciplined entry/exit rules and overlays can help exploit investor behavior. They also discuss parameter stability and why blended trend signals can be more robust than a single moving average. Commodities, Gold, and Inflation Hedges: The conversation covers why commodities can be useful diversifiers despite long-term drag, especially in inflationary or negative real-rate environments. They note that modern commodity index design can improve roll yield and that commodity fundamentals are hard to forecast. Wealth Building vs Wealth Preservation: The hosts contrast diversified, long-term investing with the faster wealth creation often found in entrepreneurship, private companies, and concentrated bets. They argue that building wealth usually requires ownership concentration, while asset allocation is more about staying rich.

Key Arguments: Value underperformance is part of normal style rotation; weak recent performance does not prove a strategy is broken. Market-cap weighting is acceptable but not optimal because it has no valuation tether and tends to overweight expensive winners. Many smart beta and quantitative strategies fail when they are based on limited history, overfitting, or poor data hygiene such as survivorship bias. Backtests are most useful when they teach history and risk awareness rather than promising precise future returns. Performance chasing differs from momentum because momentum has explicit buy/sell rules, while chasing often lacks an exit process. Trend following can be layered on top of many asset classes and factors, and blending multiple signals may reduce whipsaw risk. Commodities remain a reasonable portfolio diversifier, especially when inflation surprises or real rates are negative, but implementation matters because futures roll yield can help or hurt returns. True outperformance often comes from concentration, business ownership, private deals, or entrepreneurial effort, not from broad diversification alone.

Data Points: Value investing cumulative loss: 15% over the past decade - Referenced from a Bloomberg article claiming value has lagged badly versus the S&P 500. S&P 500 relative performance: Nearly double over the same period - Used to frame the gap between value strategies and cap-weighted equities. High dividend yield valuation: 50% valuation discount in 1999; now a premium over the past few years - Example used to illustrate factor timing and crowding. Vanguard robo-advisory assets: $65 billion - Mentioned as the largest robo platform, larger than the next three combined. General robo assets ranking: Top four platforms discussed - Vanguard, Schwab, Betterment, and Wealthfront were cited as major players. Top stocks in S&P 500 weight: Near all-time lows - Used to argue that market-cap distortions ebb and flow over time. 4% rule: Historical threshold where a U.S. company entering the top weight often gets hit hard - A rule-of-thumb cited to show how hard it is to stay dominant in the index. Largest drawdown: Always in the future - Used to caution that backtested risk estimates are often too low. Commodity portfolio example: 20% allocation in broad commodity index - Referenced via the Ivy portfolio question. Gold allocation example: 15% in gold - Attributed to Ray Dalio's style of portfolio thinking. Trend following sample history: 200-day moving average looked strong since 1999 - Used as an example of how a short backtest window can mislead. Harvard endowment drawdown: About 50% - Illustrated how a globally diversified portfolio can suffer much deeper losses than expected in crises. Business concentration example: Net worth 90% dominated by Cambria - Meb used himself as an example of concentrated wealth creation through a business. Amazon drawdowns: Multiple 50% drawdowns; about 90% in the tech bubble - Used to show that even the best stocks can be extremely volatile. Potential retirement longevity: Possibly 80, 100, or 120 years - Discussed in the context of planning for longer retirements and glide paths.

Pivotal Quotes: "The largest drawdown is always in the future." — Meb Faber: Used to warn against overconfidence in backtests and to emphasize hidden tail risk. "Performance chasing has no rules-based approach." — Meb Faber: He contrasted undisciplined hot-idea buying with systematic momentum and trend-following strategies. "If you don’t own gold, you understand neither history nor economics." — Ray Dalio (quoted by Meb): Cited during the commodities discussion to support gold as a strategic hedge.

Implications: Listeners should focus less on recent winners and more on process, diversification, valuation, and behavioral discipline. For the industry, the episode reinforces that product design, factor crowding, and data quality will matter more as quantitative strategies proliferate.