Odd Lots - Why Value Investing Has Been Doing Terribly

Episode Date: September 2, 2019

One of the oldest, most basic strategies in investing is value investing, which, for lack of a better way to put it, means "buy stocks that are cheap." Value investing, a style associated with Warren Buffett, systematically attempts to uncover low-priced stocks. But by many measures, value investing hasn't been working recently, as high-priced growth stocks (think: technology) have trounced cheap stocks. On this week's episode, we speak with Chris Meredith, Co-CIO of O'Shaughnessy Asset Management about what's behind this underperformance, and why that may be coming to an end.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Oh, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. So, Joe, when you think about value investing, what springs to mind? I guess probably immediately the image of Warren Buffett floats into my head as soon as I hear that term. or maybe that big Benjamin Graham book that I bought when I was like early on in my career and never read, but it's like one of the most famous investing books about how to invest like how they did back when they bought like the bonds from Brooklyn Railways and stuff like that. At least you're honest about it.

But I think for most people, it's definitely that image of Warren Buffett and someone sort of seeking out these undervalued stocks in the market that are going to generate longer term gains and making long. loads of money from it. That's sort of the classic value investing paradigm. Yeah. And I think like when I first became aware of how the world of investing worked, I sort of thought that was essentially the essence of it, that you're supposed to find cheap stocks and look at the stocks that had low PE ratios and low price to book ratios. And if there was a good one that had some nice low ratios, then those were the stocks to buy. And that's basically what investing is. And I know there are a lot of people who are still adherence of that approach, but over the years I've learned that there's sort of multiple approaches to doing well in the stock market. Yes, indeed. And the big headwind,

I would say, for value investing over the past, well, it's been more than a decade, actually, but basically since the start of the financial crisis sort of 2007, value investing has massively, massively underperformed a lot of other investing styles. And this means that a bunch of people have been scratching their heads trying to figure out exactly why this is happening. Yeah, there's a lot of consternation among people for whom they look at the data. And historically, it says, oh, if you buy lots of companies, a basket of companies with a low price to book ratio or a low PE ratio, they should eventually outperform. But they haven't. And that's sort of been one of the main stories post-crisis is this persistent underperformance of the so-called value factor. And people

keep trying to call the turn. They say, oh, now the Fed is raising rates. Okay, the value factor is going to outperform. Oh, we're going into a bit of a downturn. This is the moment. And it keeps eluding the adherence of this view. And you have some people saying, value is dead or this style is never going to work again. But of course, you have people holding out that eventually this approach will come back in vogue.

Yeah, exactly. And you sort of alluded to it just then. But there are all these theories about why exactly value has been underperforming. One, of course, is central banks and low interest rates. But one explanation that doesn't get as much attention has to do with technology. And this is a really interesting one, I think. Some analysts have talked about it a bit before, but the notion that big technological discoveries or turns can basically lead to underperformance and value is one that I think is worth exploring.

Right. know, it's interesting because obviously I think a lot of people know that the best stocks of the last several years have been these high-flying tech stocks like Amazon or Facebook or whatever, Netflix, which are nobody's idea. Very few people would characterize them as value stocks, at least under the traditional notion. But I guess, and we're going to talk about this on today's episode, that this isn't that rare, that there are these periods of times when there can be companies on the vanguard of a new technology, trading, extraordinary multiples, outperforming value, but it doesn't last forever. This isn't the first

time, I guess, that we've seen companies like Amazon and Netflix help expensive stocks be the big winners. Yeah, exactly. So I guess without further ado, I should bring on the guest for the episode. It is Chris Meredith. He's co-CIO over at O'Shaughnessy asset management and also a visiting lecture at Cornell University. Chris, thanks so much for coming. on. Thank you for having me. So I should just mention the reason we're having you on is actually a suggestion from your co-researcher on a recent paper, Mr. Jamie Catherwood, who was, of course, a previous Oddlots guest. Lots of people will know him as the finance history guy. He helped you look into whether or not there are historic parallels for underperformance in value investing. Just to step

back initially. Can I ask why you decided to go on the hunt for those historic parallels? Well, obviously, it's borne out of what you were talking about earlier where value has underperformed. Value is one of the bedrock principles at O'Shaunicee Asset Management, and obviously it's been a difficult time since the beginning of 2007 to set it in context, some of the style benchmarks that are used in the large cap like Russell 1,000 value versus growth over that time period from the beginning of 2007 until the middle of 2019, it's a return gap of about 136%, which is a tremendous difference. And over the last 24 months, it's an additional 20%. So that's obviously where clients, allocators, financial advisors, they're all looking to us

and trying to understand what's going on. Anybody who has a value bias against a core benchmark or growth managers that are putting value governors on it, they're all feeling this as a long-term headwind in their investment styles and strategies. And so we started taking a look. And what we had seen was there's a lot of people in industry that are using data, I call it like a short form data dump where they just take like the Fama French series and they put it out there and they're saying, look, this is the worst it's ever been. So it must be broken. Right.

And there's a lot of people that are. And just to back up when they say this is the worst it's ever been. They say this is the worst underperformance of the value factor relative to the market. And, you know, a lot of times they're dealing with shorter data series than, you know, then we have available at O'Shaunise. we've invested in a research platform that lets us test all the way back to 1926. And we've spent, you know, millions of dollars in over 10 years in order to get this platform and allowing us to do research. And one of the things that we were looking at was saying, okay, let's use our platform

and try to figure out, you know, if we've seen a period like this before. And, you know, we had built out a research data set proprietary to Osam, O'Shaughnessy, that we called Deep History, where we took all the Moody's financial statements, and we had actually a team overseas type those up and put them, into our platform. So we were able to look at things like net income and sales. And we found that there's another period of value underperformance similar to this one back in 1926 to 1941. And what's interesting is, you know, you start looking at those periods. You know, and I've heard people say, you know, what would that time period have anything to do with today? It's obviously,

it's incredibly different. And there are differences, obviously, but there's also a ton of similarities. And when we started looking at it, obviously with, you know, we see with recession, depression that happened, interest rates falling to zero in that time frame, but also the increase of technological shift of that time frame is comparable to today. And what really cemented it and made it come home was when we started, first we started looking at what companies were outperforming on the growth side versus the value side in that time frame. And you nailed it where today it is technology stocks on the growth side that are the fang stocks. Let's just sum it up that way. And on the value side, it's financial stocks, right? Those have been having a,

a structural headwind, obviously, since 2007. 95% of financial stocks wind up in the value ledger. So that's part of the split there is technology is doing great, financial stocks doing badly. That timeframe in 1926 to 41, it was manufacturing stocks that were the tech stocks of the day. And versus utilities, which I include railroads and steam railroads and utilities that were essentially the ones dragging. And the interesting part was what we found was we were doing research and we were reading. And there was one book that just cemented it and put it home. It was Carlotta Perez's technological revolutions and financial capital, where she was talking through long-term economic waves called, in that short form, they call them technological revolutions.

And they've identified five of these historically. They're able to identify them because of the timing of market crashes that come along with them. But mainly what it summed up was that the stocks that were winning in that time period can be automobile stocks. So you're talking about GM, Ford was a privately listed stock, but GM was the big one of the publicly listed at that time frame. and oil stocks like standard oil, which were supplying gasoline, and then retail stocks like Sears and Woolworth and manufacturing. And all those are bundled together with this idea of clusters of technological innovations that change the socioeconomic paradigm of how people deploy their capital. And the way to think of that is that, you know, back in the 1910s, you know, people were getting around by, yeah, it was steam railroad. That was how they got around and then it was like bicycles for the rest of it and they hadn't figured out that last mile, right?

Henry Ford invented the Model T. and in particular this idea of mass manufacturing. And the idea that then automobiles went from zero to 0.8 per household in the U.S. And all of a sudden there was this just massive change of how everybody got around the country. Was RCA was like another like massive stock market winner, the radio company. And I sort of like when I've read about the 20s, I always see like it always feels like the explosion of radio is probably similar to the internet today. Was that one of the ones that was sort of in the growth factor in those years? Radio is another great example of that

and the idea of mass manufacturing of radios but entertainment as well but in particular what's interesting is this idea of mass manufacturing led to things like Nabisco National Biscuit back in the day which started mass producing food and sending those out which led to national brands

mass culture and then advertising which led to the advent of radio and entertainment as a medium for delivering that as well so that's again it's part of that pocket of that cluster of innovation and which again just radically changed how people were basically spending their money. So, Chris, you argue that innovation from technological revolution basically changes societal

behavior in a bunch of different ways, and that impacts business and the economy in a bunch of different ways. Could you maybe dig in a little bit more into exactly how it impacts value investing? Like, what was the shift that we would have seen in the time period that you just described. Yeah, so let's back up and talk about value investing a little bit and how the value versus growth stocks and what we've seen at O'Shaughnessy with our research. We did a research paper about 18 months ago called Factors from Scratch, where we dug into the mechanics of value investing. And the way that it works is that you get compensated as an investor through a couple of avenues. If you think of it as you buy a stock and it's got a P.E. of 10 as a value investor, it's either

going to have it where it maintains the same earnings and it re-rates to like a higher multiple of a P.E. 15, in which case you get a 50% return, or the earnings are going to grow 50% and the multiple stays the same, and you get, you know, you get compensated that way. We dug in and built a framework to analyze growth stocks versus value stocks. And what happens is value stocks on average, I actually see some short term, call it flatness to decline in earnings, but then they re-rate over time period, right? But there's a stabilization where they decline a little bit, but then come back to normal growth levels, right? And growth stocks have it where there's this price for this incredible future earnings that they,

tend to not reach, right? And all this is on average over long time periods across, you know, thousands, millions of stocks that we've been looking at historically, over millions over different time periods, right? Now, what we see is in these periods where growth is outperforming value. What happens is the growth stocks actually live up to their potential. If you think about Amazon, 2018, had 10 billion, you were talking about. It had 10 billion in net income, right? 10 years ago, the company was priced about $25 to $30 billion. So it had a P.E. And a forward 10-year basis of about three, right?

So you're saying, would somebody argue Amazon's a value stock? You could argue on a 10-year basis, you know, Amazon lived up to its value. Right. And I remember like even 2012, which is forever ago, people like, oh, this crazy what people are paying for Amazon. And then you look now, it's like, not only was that not crazy, that was cheap based on what the income did over the next several years. Exactly.

And so this is the idea that there's these changes. technology, which leads to accelerated growth of companies that lives up to its potential. And that's where these technology companies, the fang stocks have earned their keep. I mean, this is different than the dot-com bubble where there was these incredible valuations and then the growth wasn't there. Yeah. Right. So that's a different time frame, a different outcome on this experience of growth.

And value stocks where you've seen, you know, financial companies obviously struggling with what's happened. They have increased regulation. They're unable to increase their growth over time. They're not stabilizing back to normal growth levels. you have energy stocks, I've seen multiple shocks, retail that's getting a headwind from Amazon.

All those stocks are having difficulty in that idea of maintaining. In fact, they've been getting the same discount. What we've seen is those discounts have been priced in pretty close to what they should have been, right? Now, the comparison from the 26 to 41 is this idea that automobiles were priced as growth stocks and those actually did great.

They grew. It was a part of the everybody bought one by the time. Right. So that's the comparison in the time frame. And on the flip side, railroads were ones that got left out. Peak railroad and passenger travel was back in 1915. And so that's one where on the value ledger, they saw a structural decline for what happened in their economic law. I want to ask you a question about the definition of value investing or maybe different approaches. And I know, like I follow Trent Griffin on Twitter. He talks a lot about the distinction between value as a sort of statistical factor, which is, you know, you look at the thousands of stocks out there and then you take the cheapest ones on various multiples. versus value as, say, approached by Warren Buffett of a concentrated portfolio, some of which may be

cheap on metrics, but some of them maybe not so cheap, but he has other things that he likes about them, whether great brands or great moats or whatever it is. Is there a distinction between those two ways in which people use the term value investing? Yeah, yes. And part of it's a simple value, right? If you just only go off of evaluation multiple. Right. We're seeing more of that nowadays with these widespread ETFs that are single-factor value model, right? And they're just basically saying we're only going to give you, like that, looking at

like you said broadly, a couple of metrics maybe and just saying these are, we're going to buy you the cheapest part of that. Versus the more the Buffett fundamental model, which is they tend to look for quality. Like you said, the good management, economic moats, some form of long-term

trend for why this company would be a good value or essentially have it more, you're able to get more qualification on that reason for the discount and the reason that it should revert back to normal multiples. At Oshanasi, we tend towards that side. We look at multiple characteristics of blending those together, things like quality of earnings, things like earnings growth, to try to determine which stocks are more likely to have the rebound. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all.

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Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. You mentioned sort of ETS, and I was curious, you know, I think back to say 20 years ago as someone trying to capture the value factor with. from the stock market. And I imagine that required a lot of legwork and a lot of people doing a lot of calculations and probably a lot of the kind of investment you're talking about of scrubbing the data and just doing it by hand. Now I could go on to anyone can sort of go into their brokerage account and click, I want to buy a value ETF and then walk away without doing any work. Does that change the game when value investing, it's no longer work to sort of even discover the

value effect or is just click of a button, someone else has done it for you? So it is easier to access, you know, quote unquote value than it has ever been before. And that's because of the product proliferation, right? Where you're seeing access or very low fee funds that are coming around. And, you know, again, like you said, they're on many platforms or ETFs. They're easy to buy. From our point of view, though ease of access doesn't mean that you're getting better investments out of it, right? Because there's a wide range of outcomes that still comes from any of these investment products. The difficulty is communicating the transparency of what

the features are in each of those products, right? So, you know, are you buying on book value? Are you buying on earnings? By the way, how are you calculating earnings? The example we gave, we wrote, I wrote a paper called Factors and Not Commodities a couple of years ago, and you were talking about going in and getting the data. There's a lot

of nuance. And again, I say nuance in my world from my seat on things like even simple as a PE ratio where you can have companies that'll wind up having it where you're depending on if you're accounting for extraordinary's, preferred dividends,

an occasional tax cut that comes around every once in a while boosting earnings, right? And if you put that on, you can wind up with some wildly different

outcomes. Kraft Hines had seven million in net income and then a seven billion in net income plus a $7 billion boost from the tax cut, right?

So if you don't account for that or not, you know, you wind up having a PE that's half of what it should be along the way. So I have a sort of

big picture existential question. And part of this is because I just got done talking with John Hempton, the hedge fund manager, who is pretty dismissive of value investors. And he sometimes refers to them as sort of bearded self-righteous people who think they're smarter than everyone else. I just want to say, I'm in the studio with Chris right now. He does not have a beer. I shaved my beard a couple months. Okay. Okay. Very important

details. So my question is, why should value investing generate higher returns than, say, growth stocks? Because isn't that basically saying that the market has misvalued the companies or misvalued their potential earnings growth, I guess? Yes, is the short answer. What happens is over a normal long-term market cycle, what we have seen, and this, again, is born out from data. We've looked at, you know, over 92 years of value investing. to show that on average, what happens again is these companies, your buy them and it's these incredible discounts. Yes, they come with some distress along the way, some near-term distress where you'll possibly

see earnings decline over 12 months, but they'll essentially get back to a normal earnings stream and earnings growth level within three years. And the market will discount those at like 30% when they should be discounted 15% based on earnings, right? So the idea is like what you're getting is that discount over a three-year-old. basis of close to 5% a year on average. Now, there are periods of time where that distress gets increased, and these companies wind up having it where they're priced effectively. And growth stocks have the flip side, where, you know, on average, their price to have this incredible growth

of like, you know, 40%, but they actually only achieved 20%, right, or 25%. So they lose 5% on average over those three years. So that's one where, again, if you look over 92 years, yes, that value investing is one that should bear out over time, but what we have seen, particularly when extending it back to include periods like 1926.41, is that there can be extended periods of time where this gets inverted. So how long should investors actually be willing to wait until they are rewarded for their value investing? Because as you mentioned before, we're now in sort of the 12th year of underperformance. It's fairly unprecedented. How much longer should people be waiting? Well, for us, that's the hardest part, which is keeping to a discipline when a strategy is working against you, right?

Obviously, this has been painful, you know, as us having a value bias within our strategies and value strategies overall, this is one where, you know, you want to see it revert back in a, in a quicker fashion, but obviously the market is held out and these growth, these growth stocks have continued to outperform. For us, what we feel would be the worst thing to do would be to abandon our principles at this point, right? And the idea is that we see that there are signs coming around of us working towards the end of this. One is this formation of oligopolis where we're seeing these companies that come out,

the Fangstocks winner. If you look at the change in leadership since 2007, the technology stocks are obviously at the top right now. But then there's this also component of, I'll call it the companies that are the previous regime starting to adopt where you're seeing large companies building out their own data science teams. And they're starting to catch up, right? So the part that was like the call it the shifting moment from the 1926 to 1941 was dieselization. of the railroad industry. They basically started and they shifted where before it had been steam engines. I didn't realize it took like three people half a day to start up a railroad, like a locomotive,

instead of turning a key and starting up an engine. So when they shifted to that, it went from again where trucking had suddenly had an economic benefit over railroads to now railroads having economic benefit over trucking. And then it started going back where value stocks shot the moon. What we expect to see happen is that, again, the technology is embedded. things like the mobile computing platform is set and standardized, and you're seeing companies like Domino's Pizza, who has been killing it in mobile because they've sat there

and they were early adopters, and they realized everybody was ordering through the web on their phone, so they built an app, and all of a sudden now they're crushing on a mobile platform. You're going to start seeing more and more of that, right? Where traditional companies are going to be seeing the benefits of the technology, and those value stocks should wind up outperforming. Didn't Domino's, didn't they come public the same day Google did, right?

Isn't that the deal with them? and they've actually, I think that they've actually outperformed Google. I didn't know that. That's a great story. I may be making that up. I think that's true, though. I think you're right, Joe. It's a good chart.

Yeah, we'll have to. I'm going back to look at that one. We'll have to accompany that chart, pizza over internet search. So just further to this point, because Tracy kind of anticipated where I was going to go at the question, when you look at that 1926 to 1941 period, what were the things that happened at the tail end of that? and explicate further on what you see is perhaps the end of the dominance of these fangs or growth factor because for several years, again, disbelief that they could continue to grow like this.

And right now, you know, it's like everyone's been foolish trying to predict the end of Netflix or trying to predict the end of how fast Google on Facebook can grow. So what are some of the signs you look for that period of underperformance for value while growth actually delivers? what does the end look like? So for me, part of it was established the form factor for how people are going to be using this new socioeconomic paradigm. And, you know, that's one where I think the

shift that came around was the introduction of the iPhone, which just radically changed how people use mobile devices. So if you think about it, the way I think about what's going on right now is that there's this technology and it started off with desktop computing in the internet. Amazon got into that and they established the trust

in that form factor of being able to have commerce over with somebody a third party basically over the internet and had that be a trusted transaction. The iPhone basically shifted that all around because if you think about the adoption curve of that and it moved people off of the desktop to mobile and to the tablet introducing that as well. And that adoption rate's hard to believe. But in 2010, there was only 20% of people with a smartphone.

And now it's like 83% of the country. And I think something like 17% are under the age of 14. So I tell you like pretty much every adult has a phone, right, at this point, has a smartphone. and they're starting to use it. So that part where, and then iPhone sales basically peaked out last year, right? So there's this adoption of the standard that's going on, and then comes the utilization of it. So in Carlotta Perez's framework, there's a installation phase and a deployment phase. And the installation phase is all about setting the standard, seeing the mass adoption,

and then comes the after effect of the golden age, she calls it, where it's all the people utilizing that. And that's where we've seen traditional value investing come around. So the signs of this are a part of it are, you know, seeing the peak. on the iPhone, seeing it where that form factor set, and then seeing other companies adopt that platform and being able to use that broadly to extend their economic models. So when the world is going through a period of disruptive new technologies, such as the rollout of the iPhone, how do you start differentiating winners and losers among value stocks? Because you actually point out in your paper that, for instance, Blackberry, at one point

basically looked like a value stock before being absolutely crushed by various pressures. So how do you avoid investing in something like a BlackBerry at precisely the wrong moment? This goes back to your point earlier about just pure ratios versus having quality themes that go along with it and other ways to look. And again, that's where at Oshana's say what we do is it may be quantitative, but we look across the entire business. So part of that is looking at the balance sheet, looking at the leverage inside of it, looking at the quality of the earnings, which is are they coming from cash flows, or are they coming from things like, you know,

manipulation of inventory or depreciation, as well as looking historical growth of the company, the momentum of the company. All these are signals that you blend together. And when you do that, you can build a quantitative profile of companies that are, call it, value traps versus, versus, you know, growth stocks,

value winners, let's call it. I think we did a follow-up paper to factors from scratch called Alpha Within Factors that talked about the difference of these and how you're able to use these other characteristics to try to forecast future earnings within value company. So in the case of Blackberry explicitly, it would have come with terrible negative earnings,

earnings growth as well as terrible momentum, and those were the reasons that it screened out of our process when it was coming through on the earnings decline. So is it more about eliminating the losers than picking the winners? I would say it's on both sides of that. But in our process, we have a part where we set the universe, there's an explicit part where we rip out companies we think are going to underperform.

So, yeah, the losers, those get the first swipe of saying, these have some really terrible characteristics. Let's just get rid of those, which is one of the benefits, I think, of an active process over a passive. So let's say we're coming to an end or maybe in a couple of years, we're coming to an end of where this explosion of new technology allows a handful of growth stocks to just massively outperform expectations. And we revert to a period that's a little more normal in which the technology is diffused, available to all. Would you then expect years and years and decades, potentially, of the value factor outperforming? That's what we've seen before, right? So I don't want to go on and say that value is going to go on and have, you know, 50 years of outperforms. And by the way, within that time frame, there's obviously shorter periods of time where value works against you.

What we have seen, we use something we call base rates, which are the percentage of time overall rolling, call it one year, three year, five year, 10 year period where value has outperform. warmed. And what we've seen is in that, call it, in between these technological revolutions, it's had significant periods of outperformance overrolling 10-year basis, like close to 100%. Mind you on a one-year basis, it winds up closer in like a 60 to 65%. I'm curious. Is regulation the big risk here? Because it does feel like a lot of technology or innovation, at least initially, starts out as sort of regulatory arbitrage, which means it could be affected very quickly. Is that one thing that you would worry about in this scenario? Actually, I think, I think regulation, well, let me say, it's one thing you should think about

as an investor. For us, we think that that's only going to, if you were to call the regulatory risk, it's predominantly on the growth side right now, because that's where there's going to be, you know, really two parts of that I see come through is regulatory risk. One is the anti-monopalistic where the size of these companies gets so big. I mean, if Amazon goes through another growth like it did over the last 10 years, obviously it would wind up having it with monopolistic, anti-monopolisic enterprise. But the second one, which I think is going to wind up being perhaps a little nearer is this idea of people starting to understand the trade they're making on their data. So that was where Senate, it was interesting. I think it was within the last month.

And again, I can't remember, I'm terrible with names. So I can't remember it was Durbin, who had proposed the bill in the Senate, where they were going to make transparent what people are receiving for their, the value. of the information you're giving them, right? So this idea of people are being tracked on their phones, I think the general level of awareness of how much is being tracked and how much of your, of a composite profile can be built for you online is being, and then being utilized, that's going to be potentially where the, that's going to have it, where regulation will come through and create transparent to that and perhaps slow that down.

I want to shift gears a little bit and throw out a theory that someone once told me about the decline of the value factor and get your take on it. So someone I was years ago, ago was arguing to me was that companies can be cheap on a ratios basis for multiple reasons. So some companies are doomed like Blackberry. Others are cyclical businesses like mining companies that might be at cyclical peaks. And so people don't pay too much for their earnings. Others are just in unpopular industries such as a newspaper and so forth. And they're all different. And his argument was that the advantage of investing in that basket was that value was essentially a good screen for diversification. Essentially, what you guaranteed by buying cheap stocks was that you bought a bunch of

different companies with different things going on and that was diversified. And that with the emergence of value ETFs and value funds, because people go in and out of the factor, they're less diversified. People buy all the value stocks at once and they sell them all at once and they start to correlate more merely because they're all in the same funds. And so the diversification benefits of value no longer exist because they're all tied by the fact that they're all part of the same ETFs and the same. Does that ring true to you at all? Is that something that you've come across like the different reasons why companies are value and whether that reduces some of the benefits to the portfolio? You know, it's interesting that first of all, one, I do

believe that the original premise that you said on value investing is right. There are stocks within value that are secular, cyclical, unpopular, you know, doomed. I like that. I like that. I I'll keep that one. But there's also healthy companies that are priced at a discount because of near-term fears that are unfounded, right? So what you're leaving inside of that is that there are healthy companies that get, you know, baby with bathwater thrown out inside of this and can have some significant outperformance along the way. That is why it's important to have a comprehensive look when looking at value stocks in order to have a quality themes that you're putting on top of it and a good understanding of picking within value, right, and understanding which types of stocks you're going to go for. staying away from the doomed, right? Yeah.

But on the part... Value, that should be an ETF, value X doomed. X doomed, yes, I like that. So, but the part about ETFs essentially arbing this out, right, where the benefit of value, we haven't seen that, right? Because what you would expect to see is spreads to narrow. Right, right. And what you would expect to see is, the number one is spreads to narrow.

But also just knowing how the, from my seat, how the panoply of ETFs work, which is they wind up in different spots, right? So you're going to wind up with some on price to book. And yeah, there's some clustering around that. And we have concerns about price to book as a factor. You know, it's better than nothing, but there's better value factors that are out there. But overall, we have not seen that there's any sort of arbitrage in the way of the value factor from ETFs in those flows. So I have one more question. And you sort of evaded it earlier, I guess.

And it's a really tough one. But using all of your historical data and the analysis that you've done, which is, you know, very detailed, what do you think is going to be the turning point in this current cycle that is going to actually lead value to outperform once again? So the point before I thought I didn't avoid it. I thought I was just being like, it's very, listen, at the end of the day, it's hard to time. You can't find a specific catalyst where that'll be it. right you know it's like oh you know that you know Walmart came out with this killer app and that did it right you know there's there's not there's not something like that that I can point to what we have are just looking at the trends historically and this is the benefit of being a quam which is I've got 92 years data I don't I know I might not have 92 years of experience but I have 92 years of data and the ability to look with a long historical lens and tie periods together and look at what happened and this idea of yes there are clusters of technological innovation, and yes, we're living through one of those now, right? So at the very least, it's giving perspective of we had a period of time where growth outperform value,

and then it shifted back to value outperforming growth for a long period of time, right? And similar. So at the very least, that's one perspective. If you think there are similarities between those timeframes, then, you know, that's one that can give you confidence that there was a time frame before where it didn't work and then it reverted back. We're living on those right now, and there's a chance that it'll, I believe, a strong chance that it will revert back. For the specific catalyst on it, we look to a couple of things. things. One is going to be that you see the formation of the, again, those oligopolis, the winners come out. The standards are set. Normal companies, like I say, of the previous regime adopt the broad technology, and they start having it where they participate in what is the economic boom that's created by these new technologies.

Yeah. I think about Walmart is a good example of a company that a lot of people view is actually getting some traction against Amazon for the first time ever. All right. Well, we're going to leave it there then. Chris Meredith of O'Shaughnessy asset management. Thanks so much for being on. No, thank you. So, Joe, one thing I sometimes think about when we're talking about value investing is just like the perception of a lot of the value companies as being a bit old fashioned. You know, they often make things or produce services and they take up a lot of fixed capital.

And when you get into a late economic cycle, I think people start to think that those companies are going to have a really hard time. adapting in a recession or lowering their costs. So I often wonder whether or not value investing's underperformance over the past decade or so is just about people continuously thinking we're late in the cycle. It definitely feels as though that while this cycle or this expansion has been one of the longest ever, people have been skeptical on it from day one. So people were probably calling it late cycle from like 2011 or maybe earlier. So there probably is something. to that. I really like that discussion because I think, you know, it helps to, A, get into sort of some of the meat and potatoes of what we talk about when we talk about quant stuff or even value investing, terms that we throw around. But what are the actual component of the trade? What are the signals people are trying to find in the data? And, you know, it's really tempting at a time when Netflix and Facebook are ascendant to say, oh, you know, the old companies are doomed.

and buy the new stuff and sell the old stuff. And it takes a lot of discipline. And some might say it's foolish discipline, but it takes a lot of discipline to not just sort of say, ah, there's a new paradigm. Yeah. Yeah. And I think, I mean, that's basically the crux of this whole discussion, right? Like, is it a cyclical downturn for value investing or is it structural? And just on the structural point, I mean, there are quite a few things that are different this time, one of which is the fact that this has been going on for 12 years, which I think is unprecedented. But the other big thing is, if you think that financials are the big underperformers of the value investing bucket in recent years, financials do seem to be facing some sort of permanent headwinds to their business model,

one of which, of course, is low interest rates. Right. Yeah. No, I mean, this is why the debate is so interesting, because I feel like you could just go back and forth and make really compelling cases either for this time is different or it feels different, but it's felt different before. Right. This is sort of like the known unknowns quote. We'll have to follow up with Chris in 10 years, and then I think we'll have a definitive answer to the debate. Well, maybe, or maybe we'll still be talking about underperformance then.

Who knows? All right. Shall we leave it there? Let's leave it there. All right. This has been another episode of the Oddlots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.

And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you should follow our guest on Twitter, Chris Meredith. He's at Chris Meredith 23. And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson, as well as the Bloomberg head of podcast, Francesca Levy, at Francesca today. And check out the new home of Bloomberg podcast on Twitter with the handle at podcasts. Thanks for listening.

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