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The demise of value investing may be greatly exaggerated

Here’s an unwanted accolade hoving into view. It won’t be long before value investing sets the record for the longest period of continuous underperformance in the history of equity investing. Currently, this dubious distinction is held by investing in smaller companies. The so-called ‘size effect’ (the performance of small-cap stocks minus that of big ones) logged 16 years of continuous underperformance in 1999. Value investing is just entering its 16th year, having started its decline in 2006.

One intuitive response is to say, ‘how can that be? It’s well-known that value investing has been doing badly, but surely not for that long?’ Fair point, but trends are often identified only with the help of hindsight. Smaller-company investing is a neat example. Even in the early 1990s it remained a universal truth that small-co stocks would always outperform. No one really knew why, not that there was a shortage of explanations. Most of these boiled down to the reasonable notion that small things can grow quicker than big things so this must apply to companies too; or, at least, until it became blindingly obvious it didn’t.

Something similar seems to be happening with value investing. Market data provider MSCI says its underperformance started in 2006. But that is the best part of 10 years before a prolonged bear market for value stocks was widely acknowledged. For most of 2006 to 2016 it was not possible to say which way value investing was going and it wasn’t until 2016 that a pronounced downward lurch set in, a drop that became vertiginous in 2018.

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