I started my career as a value investor but as people who know me for a long time (or who have followed these missives for a long time) I have become somewhat of a ‘lapsed value investor’. I still appreciate value investing but I have learned to love momentum
Jun 7, 2022·edited Jun 7, 2022Liked by Joachim Klement
Great article! But I am perplexed by your conclusion: "Instead, value investing may be due for a permanent decline as markets become ever more short-term oriented."
My understanding is that:
1. There are capacity limits to every strategy.... so when the strategy gets overcrowded the money moves somewhere else (to Value maybe?)
2. Momentum/Trend following might drive Valuations up. At one point Overvaluations will be deemed unbearable any longer, prices collapses, and a people shift towards fundamental strategies (like Value, Profitability)
3. Short Term Momentum seems to work best with high turnover stocks (=Largest 500 stocks), and doesn't work so well with with Small Caps (before transaction costs!) (FF6 Alpha t-stat: 1st quintile (microcap) -1.26, 2nd quintile 0.07) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3150525 and https://alphaarchitect.com/2022/06/short-term-momentum/). So if "value investing may be due for permanent decline" would be true, then this would be true for the S&P 500 segment, and not so much for the small cap segment?
A Keynesian beauty contest in other words?
Great article! But I am perplexed by your conclusion: "Instead, value investing may be due for a permanent decline as markets become ever more short-term oriented."
My understanding is that:
1. There are capacity limits to every strategy.... so when the strategy gets overcrowded the money moves somewhere else (to Value maybe?)
2. Momentum/Trend following might drive Valuations up. At one point Overvaluations will be deemed unbearable any longer, prices collapses, and a people shift towards fundamental strategies (like Value, Profitability)
3. Short Term Momentum seems to work best with high turnover stocks (=Largest 500 stocks), and doesn't work so well with with Small Caps (before transaction costs!) (FF6 Alpha t-stat: 1st quintile (microcap) -1.26, 2nd quintile 0.07) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3150525 and https://alphaarchitect.com/2022/06/short-term-momentum/). So if "value investing may be due for permanent decline" would be true, then this would be true for the S&P 500 segment, and not so much for the small cap segment?