Why Value Investing Has Been Doing Terribly

Episode Summary

Executive Summary: The episode examines why value investing has lagged for more than a decade and argues that technological revolutions can create long stretches where growth stocks outperform. Guest Chris Meredith compares today’s market to 1926-1941, when innovation reshaped winners and losers, and says value should eventually recover as technologies mature and diffuse.

Main Topics: Why value investing has underperformed (Priority: 5/5): Tracy and Joe frame the long post-2007 stretch in which low-valuation stocks have lagged growth, noting the persistence of the disappointment and the debate over whether value is broken or merely cyclical. Technology as a driver of factor performance (Priority: 5/5): Meredith argues that major technological revolutions can make expensive growth stocks justify their valuations while making old-economy value stocks struggle, creating multi-year or multi-decade periods of factor reversal. Historical parallel: 1926-1941 (Priority: 5/5): Using deep historical data, Meredith says the closest analog to today is the 1926-1941 period, when manufacturing, autos, radio, and retail were the growth winners while railroads and utilities lagged. How value investing works in practice (Priority: 4/5): The discussion breaks down the mechanics of value: cheap stocks can outperform if earnings recover and multiples re-rate, but growth can win when lofty expectations are actually met. Quality versus pure valuation screens (Priority: 4/5): The episode distinguishes simple factor ETFs that buy cheap stocks from more fundamental or quantitative approaches that incorporate quality, balance sheet strength, earnings quality, and momentum to avoid value traps. When the current cycle might turn (Priority: 4/5): Meredith says no single catalyst can be timed precisely, but cites signs such as technology standardization, diffusion to traditional firms, and the maturation of mobile computing as indications value may recover. Regulation and oligopoly risk (Priority: 3/5): The conversation closes by noting that regulation may increasingly challenge dominant growth firms, especially around monopolistic power and data transparency, potentially helping rebalance the market.

Key Arguments: Value underperformance since 2007 is unusually severe, but historical data suggests similarly long stretches have happened before. Technological revolutions can cause growth stocks to outperform value for long periods because new technologies let leading companies realize earnings growth that markets once assumed only in theory. The 1926-1941 period resembles today: autos, radio, and manufacturing played the role of today’s tech/FANG leaders, while railroads and utilities resemble today’s financials and other value sectors. Simple value screens are not enough; combining valuation with quality, earnings growth, leverage, and momentum helps separate value winners from value traps. ETF access has made value easier to buy, but easier access does not necessarily improve the quality of returns or eliminate dispersion across value stocks. A reversal toward value may come when technology becomes standardized and widely adopted, allowing slower-growing incumbent firms to benefit from the new tools. Regulatory pressure may increasingly hit large growth companies due to monopoly concerns and data-privacy transparency. The right approach for long-term value investors is discipline: abandoning the strategy after a long underperformance risks missing the eventual mean reversion.

Data Points: Value underperformance window: Since the start of 2007 - Meredith says value has been underperforming for this entire period, making it a major concern for clients and allocators. Return gap: About 136% - Gap between Russell 1000 Value and Russell 1000 Growth from early 2007 to mid-2019. Additional gap over last 24 months: 20% - Meredith says the underperformance widened further in the two years prior to the interview. Historical dataset coverage: Back to 1926 - O'Shaughnessy’s research platform allows testing across nearly a century of market history. Deep history source: Moody’s financial statements typed up by an overseas team - Used to build proprietary historical data on income and sales. Alternative underperformance period: 1926 to 1941 - The closest historical analogue Meredith identifies for today’s value underperformance. Amazon example: $10 billion net income in 2018 - Used to illustrate how a stock once priced cheaply on a long-horizon basis eventually justified its valuation. Amazon early valuation: $25 billion to $30 billion - Approximate market value about 10 years before 2018, implying a very low long-term price-to-earnings ratio. Amazon implied P/E: About 3 on a 10-year basis - Meredith argues Amazon looked cheap in hindsight because earnings growth far exceeded expectations. Smartphone adoption: 20% in 2010 to 83% now - Used to describe the move from installation phase to deployment phase of mobile computing. Age-related phone ownership: 17% under age 14 - Supports the claim that nearly every adult now has a smartphone. Value outperformance base rate over 10-year periods: Close to 100% - Meredith says value has historically performed strongly on rolling 10-year bases between technological revolutions. Value outperformance base rate over 1-year periods: 60% to 65% - Shows that even in favorable regimes, short-term value performance can be inconsistent. O'Shaughnessy research duration: Over 10 years - Refers to the time and money spent building the historical research platform.

Pivotal Quotes: "There can be extended periods of time where this gets inverted." — Chris Meredith: Explaining that value normally wins over time, but technological eras can reverse the expected relationship for many years. "The point before, I thought I didn't avoid it. I thought I was, I was just being like, it's very, it's listening. At the end of the day, it's hard to time." — Chris Meredith: On why he cannot pinpoint a single catalyst that will mark the turn from growth dominance back to value outperformance. "What we feel would be the worst thing to do would be to abandon our principles at this point." — Chris Meredith: Meredith’s advice to stay disciplined even after a long stretch of underperformance.

Implications: Listeners should see value underperformance as potentially cyclical and historically rooted, not necessarily broken. The debate now hinges on whether technology has merely delayed, or fundamentally changed, the next value cycle.