The value cycle

Chris Dillow

Chris Dillow
The value cycle

In the early 1980s, economists pointed out that smaller stocks had outperformed larger ones for decades. That inspired investors to pile into them and into the new small-cap funds set up to meet that demand. Such big buying, however, pushed up smaller stocks’ prices too far – so much so that in 1998 Paul Marsh and Elroy Dimson, two economists at the London Business School, pointed out in a paper entitled 'Murphy’s law' that the small-cap premium had disappeared. But then Murphy’s law asserted itself in another way, and small-caps beat bigger ones in the following five years.

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