Why Has Value Investing Underperformed?

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During his recent interview with Tobias, Jake Taylor of Farnam Street provides some great insights into why he thinks value investing has had such a rough time lately, saying:

Jake – I think it’s a confluence of factors. I don’t know honestly. If I had to assign how much do I understand or not understand, I may be in 50% understanding. I think a big part of it has been the indexation and a absolute orphaning of some stocks that just get no, no one is paying attention to them now and they’ve just been just completely sold off in crazy ways. For instance one company that we own. It was clear as day that they were going to do a dual-class structure.

I mean it had been telegraphed for months on end. It was no surprise when the vote happened. And they voted for a dual-class structure and went to that. And the next day all the indexes just sold it off because they had some mandate like we’re not gonna hold dual-class structure in this index product.

The thing’s down 50% overnight even though absolutely nothing has changed about the intrinsic value of the company. And the ability of the company to make money. There was already a controlling shareholder at that point so it wasn’t like this dual-class structure changed anything. Even corporate governance wise hardly. So silly things like that I think are happening. I think there’s a bifurcation in the market right now where the indexes are buying at any price. I wanna say index I should say basically like…

Tobias – The cap weighted index or the ETF.

Jake – Yeah whatever it is, whether it’s a mutual fund or an ETF is buying whatever price it is and buying more of the biggest and most expensive and creating it’s own momentum. I don’t know how long that goes on. The other thing too I think that really has hurt has been the, I think a lot of the cheap, the really really cheap stuff has like let’s say the cheapest 10% of the market is not gotten that cheap.

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