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For ten years growth has outperformed value. Does the value premium not work anymore? I think it may not work as well. The reason is things work well, when no one knows about them. In 1992, French, and Fama discovered the French Fama 3 factor model. This means that you achieve the best performance by following 3 factors.

1. Stocks outperform bonds
2. Value outperforms
3. Small cap outperforms

Once this was known, people started buying more small value stocks, and the advantage was arbitraged away.

However, I think it will still work. For one thing, the growth of growth stocks tapers off. When that happens the high p/e stocks get slammed. Value stocks, realize they are doing something wrong, and make changes, and their earnings increase, and catch up to the market, and their prices go up faster than the market.

However, I think the main reason value will still work is because it stops working for long periods of time, and people give up on it. If it always worked, it would be arbitraged away.
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It think there are several separate issues going on here.

One is the definition of "value" you use.
The definitions used in the index definitions underlying popular ETFs are silly.
For example, low sales growth is a predictor of a bad business, not one that's undervalued.
They are seeking bad companies as much as they are seeking undervalued ones.
So, any conclusions or headlines on those ETFs or indexes can be safely ignored, at least in terms of magnitude.

But say you start with a slightly more sane (if limited) definition of "value" as low P/E firms.
These too have been unusually poor performers lately compared to history, on a relative basis compared.
(bottom 20% of VL stocks by P/E outperformed the S&P 500 by +13%/year 2000-2013, but underperformed by -3%/year 2015-2018).
But consider:
Some firms have low P/E ratios for a good reason. Poor prospects for growth of the business, mainly.
Others have low P/E ratios due to random variation in prices. The market is just in a bad mood.
Any given low P/E firm my be in that category for either or both of those reasons.

The outperformance of value strategies relies entirely on the second one: things that are not just cheap, but also are cheaper than they deserve to be.
So, we can see wide dispersion of P/E ratios these days, but perhaps (?) a relatively low frequency of *unwarranted* low P/E ratios.
That would cause the "value outperforms" rule to get broken.
The bargain bin has been so thoroughly picked over that it's almost entirely broken stuff.
A lot of the "value" investors out there may be using dumb criteria, but they're capable of buying firms with low P/E ratios.

A market disruption is likely to change this.
The mood of the markets gets pretty irrational sometimes.
People sell what they CAN sell (often what has dropped least), rather than what they should or want to sell.
And fewer people will have the cash to pick over the bargain bin, letting it fill up with a better variety of goods.

Jim
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The trick is to avoid "junky" value stocks; then value works. Cliff Asness et al:

https://link.springer.com/article/10.1007/s11142-018-9470-2
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These too have been unusually poor performers lately compared to history, on a relative basis compared (bottom 20% of VL stocks by P/E outperformed the S&P 500 by +13%/year 2000-2013, but underperformed by -3%/year 2015-2018).

That encouraging for the next bear market in that it increases the chance of someplace to hide. Value stocks very much underperformed in the late 1990s, a value valley of death. That mean that in the following three-year bear there were stocks and screens that did well. This is in contrast to 2008 were everything went down together.

DB2
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That encouraging for the next bear market in that it increases the chance of someplace to hide.
Value stocks very much underperformed in the late 1990s, a value valley of death.
That mean that in the following three-year bear there were stocks and screens that did well.
This is in contrast to 2008 were everything went down together.


I had that thought, too.
But it might not be very comforting.

Last time around, 2000-2002, one of the reasons it worked was that the value stocks ended the tech bubble being extremely cheap.
Quant screens on value worked, but then almost anything on value worked.

That is not so much the case right now.
Most things, even very ordinary firms, are at quite rich valuations compared to history.

So the quant stuff might find an advantage yet again in the cheaper stuff, but it might not be that great.
Maybe they'll outperform a falling market but not by enough to create positive performance.

Who knows?

Jim
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