Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, when you think about value investing, what what springs to mind? Um? I guess probably immediately the image of Warren Buffett floats into my head as soon as I hear that term, or maybe that big um 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 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 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 adherance 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 uh, well, it's been more than a decade actually, but basically since the start of the financial crisis sort of two thousand seven, value investing has massively, massively underperformed a lot of other investing styles. And this means that a bunch of people have been watching 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 if you buy lots of companies, a basket of companies with the low price to book ratio or low PE ratio, they should eventually outperform um. 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 now the fetters raising race. Okay, the value factors gonna perform. 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 and 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. The big one, of course, is central banks and low interest rates. But one explanation, uh that doesn't get as much attention has to do with technology. And this is a really interesting one I think. Um, you know, some analysts have talked about it a bit before, but the notion that big technological discoveries or turns can basically lead to under performance and value is one that I think is worth exploring, right And you know, it's interesting because obviously, I think a lot of people know that the best stocks of the last several years have been this 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, uh, 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 a companies on the vanguard of a new technology, trading at 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 c I O 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 your co researcher on a recent paper, Mr Jamie Catherwood, who was of course a previous odd lots guests. Lots of people will know him as the finance history guy. He helped you look into whether or not there are historic parallels for under performance in value investing. Just to step back initially, can I ask why you decided to 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'shaughnessysset Management. And obviously it's been a difficult, you know, time since the beginning of two thousand seven. To set it in context, some of the style benchmarks that are used in the large cap like Russell one thousand, value versus growth over that time period from the beginning in two thousand seven to the middle of it's a it's a return gap of about thirty six percent, which is a tremendous difference, and over the last twenty four months it's an additional 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 aided dump where they just take like the Fama French series and they put out there and they're saying, look, this is this is the worst it's ever been, so it must be broken, right, UM. And there's a lot of people that are just just just to back up when they say this is the worst that's ever been, they say, this is the worst under performance of the value factor relatively the market. And you know, a lot of times they're dealing with shorter data series than than you know, than we have available at O'Shaughnessy because we've invested in a research platform that lets us test all the way back to ninety six and we've spent you know, millions of dollars and million over ten years in order to get this platform and allowing us to do research. UH. And one of the things that we were looking at was saying, okay, let's let's use our platform and try to figure out, you know, if we've seen a period like this before. UH. And you know, we had built out a research data set proprietary to osam O'Shaughnessy that we call Deep History, that where we took all the Moody's financial statements and we we had to actually 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 under performance similar to this one back in nineteen And what's interesting is, you know, you start you start looking at those periods, um you know, and I've 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, um And and there are differences obviously, but there's also a ton of similarities. And when we started looking at it, obviously with you know what we see with recession depression that happened, interest rates falling to zero and that time frame, but also that the the increase of technological shift of that time frame is comparable to today. And what really cemented it and and and made it come home was when we we started first we started looking at what companies were outperforming on the growth side versus the value side, and that time frame and you you you nailed it. Where today it is technology stocks on the growth side that are the fang stocks, let's just you know, sum it up that way. And on the on the value side, it's financial stocks. Right, those have been having a structural headwind obviously since two thousand seven. Financial stocks wind up in the value ledger, right, So that's part of the split there is technology is doing great. Financi stockstone entally that time frame forty one, it was manufacturing stocks that were the tech stocks of the day and versus utilities and 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 that just cemented and put it home, and it was Carlotta Perez's Technological Revolutions and Financial Capital, where she was talking through long term economic waves called that short form, they call him technological revolutions, and they've identified five of these. Historically they're able to identify because the timing of market crashes that come along with them. But mainly, what what it summed up was that the stocks that we're winning in that time period, Uh can be automobile stocks, so you're talking about GM. Ford was a privately list of stock, but GM was the big one of the of the publicly listed at that time frame. And oil stocks like standard Oil, which we're supplying gasoline, and then retail stocks like Sears and will Worth in manufacturing and all those are bundled together with this id you have clusters of technological innovations that changed the socioeconomic paradigm of how people deploy their capital. And the way to think of that is that, you know, back in the nineteen tens, you know, people were getting around by the steam railroad and 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 Tea and in particular this idea of mass manufacturing and the idea that then automobiles went from zero to zero point eight per household in the US, and all of a sudden there was this just massive change of how everybody got around the country. Was our c A was like another like massive stock market winner, the Radio Company. And I sort of like when I've read about the twenties. 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 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 Nibisco National Biscuit back in the day, which started mass producing food and sending those out with which led to national brands, mass culture, and then advertising, which led to the advent of radio and entertainments and medium for delivering that as well. So that's again it's part of that pocket, that cluster of innovation and which again just radically changed how people were basically just spending their money. So, Chris Uh, 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 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 eighteen months agoll Ago called Factors from Scratch, where we dug into the mechanics of value investing. And the way that it works is that, um you get compensated as an investor through a couple of avenues. One if you think of it as you buy a stock and it's got a a pe of ten. As a value investor, it's either going to have it where it maintains the same earnings and it and it rerates to like a higher multiple of a PEU fifteen, which gives you get a fifty percent return, or the earnings are going to grow in 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 actually see some short term call it flatness to decline and earnings, but then they re rate over time period, right, but there's a stabilization where they 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 these incredible future earnings um that they tend to not reach, right. And all this is on average over to long time periods across you know, thousands millions of stocks that we've been looking at historically over our 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 right now, Amazon had ten billion, you're talking about it had ten billion in net income. Right ten years ago, the company was priced about thirty billion dollars, so it had a pe of on a four ten year basis of about three. Right, So you're saying, would somebody argue Amazon's value stock you could argue on a ten year basis, you know, Amazon lived up to its value, right. And I remember, like, even which is forever ago, people like, oh, this's 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 in 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 have earned their 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, right, So that's a different time a different time frame, a different outcome on this. This experience of growth in value stocks where you've seen you know, financial company is obviously struggling with what's happened. They have increased regulation, they're unable to increase their their growth over time, and they're not they're not stabilizing back to normal growth levels. You have energy stocks have seen multiple shocks, Retail that's getting a head wind from Amazon. All those stocks are having difficulty and 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 pretty close to what they should have been right now. The comparison from the forty one is this idea that automobiles were priced this growth stocks, and those actually did great, they grew. It was a part of the everybody everybody bought one by the time, So that's the comparison and the time framing. On the flip side, railroads were once that got I got left out peak railroad and passenger travel was back in. And so that's one where on the value letter they saw a structural decline for what happened in their economic Well, I want to ask you a question about the definition of value investing or maybe different approaches. And I know, like I follow trend Griffin on Twitter. He talks a lot about the distinction between value as a sort of satistical 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 modes or whatever it is. Okay, is there a distinction between those two ways in which people use the term value investing? Yes, and and and part of it's a simple value, right if you just only go off of evaluation multiple, we're seeing more of that nowadays with these widespread etf that are single value factor or value models, 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 you know, the more the buffet fundamental model, which is they tend to look for quality, like you said, the good management economic modes, UM, some form of called long term trend for why this company would be a good value or essentially you know, we have it where you're able to get more qualification on that reason for the discount and the reason that I should revert back to normal multiples and O shaughnessy, we 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 you mentioned um sort of e t S. And I was curious, you know, I'm I think back to say twenty years ago, as someone trying to capture the value factor within the stock market, and I imagined that like 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 et F 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 factor 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 of our very low fee funds that are coming around and and you know, again like you said, they are on many platforms. Are et fs are 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 of what the 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 cult Factors and not Commodities a couple of years ago, Um, 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 as simple as a PE ratio, where you can have companies that will wind up having it where you're depending on if you're accounting for extraordinaries, preferred dividends, an occasional tax cut that comes around every once in a while boosting earnings, right, And if you put that all and you can wind up with some wildly different outcomes. Kraft Heins had seven million net income and then at seven seven billion and met income plus a seven billion dollar 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 um John Hampton, 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 say, I'm in the studio with with Chris right now. He does not have a beer. I shaved my beer a couple of 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 um misvalued their potential earnings growth. I guess yes, is the is the short answer. What happens is over a normal long term market cycle, what we have seen, and this again is borne out from data we've looked at, you know, over ninety two years of value investing to show that on average, what happens again is these companies your biomins these incredible discounts. Yes, they come with some distress along the way, some near term distress where um you'll possibly see earnings decline over twelve months, but they'll re essentially get back to a normal earning stream and earnings growth level within three years, and the market will discount those at thirty percent when they should be discounted fiftcent based on earnings. Right, So the idea is, like, what you're getting is that discount over a three year basis of close to five percent a year on average. Now, there are periods of time where that distress gets increased and these companies wind up having it where their priced effectively and growth stocks have the flip side where you know, on average their priced to have this incredible growth of like, but they actually only achieve twenty percent, right, or so they lose five percent on average over those three years. So that's one where again if you look over ninety two 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 one, is that there can be extent periods of time where this gets in burned. 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 twelve fear of under performance, it's fairly unprecedented. How much longer should people be waiting? Well, for us, that's that's 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 with our strategies and value strategies overall. This is one where you know you want to see it revert back in a 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 his formation of oligopolies, where we're seeing these companies that come out the fank stocks winner. If you look at the change in leadership since two thousand seven, the technology stocks are obviously at the top right now. But then there's this also component of call it the companies out are the previous regime starting to adopt, where you're seeing large companies building out their own data science teams um and they're starting to catch up. Right. So the art that was like the call it the shifting moment from the forty one was dieselization of the railroad industry. They basically started and they shifted where before it had been steam engines that I didn't realize that it took like three people a half a day to start up in a railroad like a locomotive instead of turning a key and starting up an engine. So when they shifted to that, they went from again where trucking had suddenly had an economic benefit over railroads to now railroads having economic you know, benefit over or 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 is embedded. Things like the mobile computing platform is is set and standardized, and you're seeing companies like you know, Domino's Pizza, who has been killing it in mobile because they've sat there and they were there 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 they're they're crushing in a mobile platform. You're gonna start seeing more and more of that right where traditional companies are going to be me seeing the benefits of the technology and those values stoction wide about performing didn't Domino 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. Didn't know that. Maybe that's a great story. 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 we'll have to go 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 with the question, when you look at that ninety one 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 that period of underperformance for value while growth actually delivers. What if what if the end looked like so For for me, part of it was established the establishing the form factor for how people are gonna be using this new socio economic 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 gotten 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 have that be a trusted transaction. Uh. The iPhone, he basically shifted that all around. And because if you think about the adoption curve of that and to move people off of the desktop to mobile and to the tablet introducing that as well, and that adoption rate's hard to bleep. But in there was only people with a smartphone, and now it's a of the country and you know, I think something like sevent or under the age of fourteen, So I tells you like pretty much every adult has has a phone right at this point has a smart phone, and they're and they're starting to use it. So that part where and then iPhone sales basically peeked out last year, right, So there's there's part where 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 the deployment phase, and the installation phase is all about setting the standards, seeing the mass adoption, and then comes the after effect to 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 where that form in factor is 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 you know, just pure ratios versus having quality themes that go along with it in other ways to look and again that's where at O'Shaughnessy. What we do is it maybe quantitative, but we look across the entire business. So part of that is looking at the balance sheet, looking at the leveraging side of it, looking at the quality of the earnings, which is are they coming from cash flows, are they coming from things like you know, manipulation of inventoria or depreciation uh, 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 called value traps versus versus UH. You know, growth stocks are value winners, let's call it. I think we did a follow up paper two 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 companies. 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 I have 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 it's on both sides of that. But we 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 underperformed. So, yeah, the losers, those get the first swipe of saying these are 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 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 referred to a period that's a little more normal in which the technology is diffused available to all. Would we in 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 out and have you know, fifty years of out performs and 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 over a rolling call it, one year, three year, five year, ten year period where value has outperformed. Uh. And what we've seen is in that call it in between these technological revolutions, it's had a significant periods of out performance over rolling ten year basis. Like close to mind you on a one year basis, it winds up closer in like a sixty to sixty 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, um very quickly. Is that one thing that you would worry about in this scenario? Actually, I think 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 gonna if you were to call the regulatory risk, it's predominantly on the growth side right now, um, 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 monopolistic where the size of these companies get so big. I mean, if Amazon goes through another growth like it did over the last ten years, obviously it would wind up having with monopolistic anti monopolistic enterprise. But the second one, which I think is going to wind up being perhaps a little mirror, is this idea of um, people starting to understand the trade they're making on their data. UM. 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 who was. It was Durban who who have had proposed the bill in the Senate where they were going to make transparent what people are receiving, you know, for there the value of the information you're giving them. Right, this idea of people are being tracked on their phones, um, 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 gonna have it, where a regulation will come through and create transparent to that and perhaps slow that down. I wanna 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 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 et f s 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 that. First of all, one, I do believe that the original premise that you you said on value investing is right. There are stocks within value that are secular, cyclical, on popular, you know, doom. I like that, I'll keep that one and so that. But there's also healthy companies that are priced at a discount because of near term fears and 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. Uh and and and a good understanding of of picking within value right and understanding which types of stocks you're gonna go for and staying away from the doomed right. So but on the part value that should be an e t F value x doom x doomed. Yes, I like that. So but the the part about ETFs essentially are being this out right where the benefit of value we haven't seen that, right, because what you would expect to see is spread scenario um. And what you would expect to see is is the number one is spread scenaril. 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 gonna 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 it's better than nothing, but there's better value factors that are out there. Um. But overall, we have not seen that there's any sort of any sort of arbitraging way of the value factor from ETFs in those flows. So I have one more question, um, 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 I thought I didn't avoid it. I thought I was. I was just being like that. It's very listening. At the end of the day, it's hard to time. You can't find a specific catalyst where that will 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 none 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 quant which is I've got ninety two years Dad, I don't. I might not have ninety two years of experience, but I have ninety two 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 work growth outperformed value and then it shifted back to value out performing 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 time frames, 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 with those right now, and there's a chance that I believe a strong chance that I will revert back. For the specific catalysts on it, we look to a couple of things. One is going to be that you see the formation of the again, those oligopolies, 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. And what is the economic boon 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 subtraction against Amazon for the first time ever. Alright, well, we're going to leave it there then, Chris Meredith of O'Shaughnessy Asset Management, thanks so much for being on now. Thank you so, Joe. One thing I sometimes think about um 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 produced 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 timed adapting in a recession or lowering their costs. So I often wonder whether or not value investings under performance over the past decade or so is just about people continuously thinking we're late in the cycle. It definitely feels as though the 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 two thousand eleven or maybe earlier. So there probably is something too that I really like the discussion because I think, you know, it helps to uh get into sort of some of the meat and potatoes of what we talked about when we talk about quant stuff or even 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 company, these are doomed and buy the new stuff and sell the old stuff. And it takes a lot of discipline. Um and some might say it's foolish discipline, but it takes a lot of discipline to not just sort of say, oh, there's a new paradigm, you gotta dump everything. 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 twelve 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, Now, 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. This is sort of like the known unknowns quote. We'll have to follow up with Chris and ten years and then I think we'll have a definitive answer to the debate. Well maybe, or maybe we'll still be talking about under performance then who knows? Um? All right, shall we leave it there? Let's leave it there, all right? This has been another episode of the ad Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wisn't All. You can follow me on Twitter at the Stalwart, and you should follow our guest on Twitter, Chris Meredith. He's at Chris Meredith twenty three. And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura m Carlson, as well as the Bloomberg head of podcasts, Francesca Leavi at Francesca Today and check out the new home of Bloomberg podcast on Twitter with the handle at podcasts. Thanks for listening to

Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, when you think about value investing, what what springs to mind? Um? I guess probably immediately the image of Warren Buffett floats into my head as soon as I hear that term, or maybe that big um 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 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 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 adherance 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 uh, well, it's been more than a decade actually, but basically since the start of the financial crisis sort of two thousand seven, value investing has massively, massively underperformed a lot of other investing styles. And this means that a bunch of people have been watching 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 if you buy lots of companies, a basket of companies with the low price to book ratio or low PE ratio, they should eventually outperform um. 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 now the fetters raising race. Okay, the value factors gonna perform. 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 and 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. The big one, of course, is central banks and low interest rates. But one explanation, uh that doesn't get as much attention has to do with technology. And this is a really interesting one I think. Um, you know, some analysts have talked about it a bit before, but the notion that big technological discoveries or turns can basically lead to under performance and value is one that I think is worth exploring, right And you know, it's interesting because obviously, I think a lot of people know that the best stocks of the last several years have been this 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, uh, 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 a companies on the vanguard of a new technology, trading at 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 c I O 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 your co researcher on a recent paper, Mr Jamie Catherwood, who was of course a previous odd lots guests. Lots of people will know him as the finance history guy. He helped you look into whether or not there are historic parallels for under performance in value investing. Just to step back initially, can I ask why you decided to 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'shaughnessysset Management. And obviously it's been a difficult, you know, time since the beginning of two thousand seven. To set it in context, some of the style benchmarks that are used in the large cap like Russell one thousand, value versus growth over that time period from the beginning in two thousand seven to the middle of it's a it's a return gap of about thirty six percent, which is a tremendous difference, and over the last twenty four months it's an additional 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 aided dump where they just take like the Fama French series and they put out there and they're saying, look, this is this is the worst it's ever been, so it must be broken, right, UM. And there's a lot of people that are just just just to back up when they say this is the worst that's ever been, they say, this is the worst under performance of the value factor relatively the market. And you know, a lot of times they're dealing with shorter data series than than you know, than we have available at O'Shaughnessy because we've invested in a research platform that lets us test all the way back to ninety six and we've spent you know, millions of dollars and million over ten years in order to get this platform and allowing us to do research. UH. And one of the things that we were looking at was saying, okay, let's let's use our platform and try to figure out, you know, if we've seen a period like this before. UH. And you know, we had built out a research data set proprietary to osam O'Shaughnessy that we call Deep History, that where we took all the Moody's financial statements and we we had to actually 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 under performance similar to this one back in nineteen And what's interesting is, you know, you start you start looking at those periods, um you know, and I've 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, um And and there are differences obviously, but there's also a ton of similarities. And when we started looking at it, obviously with you know what we see with recession depression that happened, interest rates falling to zero and that time frame, but also that the the increase of technological shift of that time frame is comparable to today. And what really cemented it and and and made it come home was when we we started first we started looking at what companies were outperforming on the growth side versus the value side, and that time frame and you you you nailed it. Where today it is technology stocks on the growth side that are the fang stocks, let's just you know, sum it up that way. And on the on the value side, it's financial stocks. Right, those have been having a structural headwind obviously since two thousand seven. Financial stocks wind up in the value ledger, right, So that's part of the split there is technology is doing great. Financi stockstone entally that time frame forty one, it was manufacturing stocks that were the tech stocks of the day and versus utilities and 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 that just cemented and put it home, and it was Carlotta Perez's Technological Revolutions and Financial Capital, where she was talking through long term economic waves called that short form, they call him technological revolutions, and they've identified five of these. Historically they're able to identify because the timing of market crashes that come along with them. But mainly, what what it summed up was that the stocks that we're winning in that time period, Uh can be automobile stocks, so you're talking about GM. Ford was a privately list of stock, but GM was the big one of the of the publicly listed at that time frame. And oil stocks like standard Oil, which we're supplying gasoline, and then retail stocks like Sears and will Worth in manufacturing and all those are bundled together with this id you have clusters of technological innovations that changed the socioeconomic paradigm of how people deploy their capital. And the way to think of that is that, you know, back in the nineteen tens, you know, people were getting around by the steam railroad and 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 Tea and in particular this idea of mass manufacturing and the idea that then automobiles went from zero to zero point eight per household in the US, and all of a sudden there was this just massive change of how everybody got around the country. Was our c A was like another like massive stock market winner, the Radio Company. And I sort of like when I've read about the twenties. 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 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 Nibisco National Biscuit back in the day, which started mass producing food and sending those out with which led to national brands, mass culture, and then advertising, which led to the advent of radio and entertainments and medium for delivering that as well. So that's again it's part of that pocket, that cluster of innovation and which again just radically changed how people were basically just spending their money. So, Chris Uh, 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 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 eighteen months agoll Ago called Factors from Scratch, where we dug into the mechanics of value investing. And the way that it works is that, um you get compensated as an investor through a couple of avenues. One if you think of it as you buy a stock and it's got a a pe of ten. As a value investor, it's either going to have it where it maintains the same earnings and it and it rerates to like a higher multiple of a PEU fifteen, which gives you get a fifty percent return, or the earnings are going to grow in 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 actually see some short term call it flatness to decline and earnings, but then they re rate over time period, right, but there's a stabilization where they 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 these incredible future earnings um that they tend to not reach, right. And all this is on average over to long time periods across you know, thousands millions of stocks that we've been looking at historically over our 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 right now, Amazon had ten billion, you're talking about it had ten billion in net income. Right ten years ago, the company was priced about thirty billion dollars, so it had a pe of on a four ten year basis of about three. Right, So you're saying, would somebody argue Amazon's value stock you could argue on a ten year basis, you know, Amazon lived up to its value, right. And I remember, like, even which is forever ago, people like, oh, this's 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 in 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 have earned their 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, right, So that's a different time a different time frame, a different outcome on this. This experience of growth in value stocks where you've seen you know, financial company is obviously struggling with what's happened. They have increased regulation, they're unable to increase their their growth over time, and they're not they're not stabilizing back to normal growth levels. You have energy stocks have seen multiple shocks, Retail that's getting a head wind from Amazon. All those stocks are having difficulty and 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 pretty close to what they should have been right now. The comparison from the forty one is this idea that automobiles were priced this growth stocks, and those actually did great, they grew. It was a part of the everybody everybody bought one by the time, So that's the comparison and the time framing. On the flip side, railroads were once that got I got left out peak railroad and passenger travel was back in. And so that's one where on the value letter they saw a structural decline for what happened in their economic Well, I want to ask you a question about the definition of value investing or maybe different approaches. And I know, like I follow trend Griffin on Twitter. He talks a lot about the distinction between value as a sort of satistical 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 modes or whatever it is. Okay, is there a distinction between those two ways in which people use the term value investing? Yes, and and and part of it's a simple value, right if you just only go off of evaluation multiple, we're seeing more of that nowadays with these widespread etf that are single value factor or value models, 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 you know, the more the buffet fundamental model, which is they tend to look for quality, like you said, the good management economic modes, UM, some form of called long term trend for why this company would be a good value or essentially you know, we have it where you're able to get more qualification on that reason for the discount and the reason that I should revert back to normal multiples and O shaughnessy, we 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 you mentioned um sort of e t S. And I was curious, you know, I'm I think back to say twenty years ago, as someone trying to capture the value factor within the stock market, and I imagined that like 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 et F 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 factor 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 of our very low fee funds that are coming around and and you know, again like you said, they are on many platforms. Are et fs are 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 of what the 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 cult Factors and not Commodities a couple of years ago, Um, 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 as simple as a PE ratio, where you can have companies that will wind up having it where you're depending on if you're accounting for extraordinaries, preferred dividends, an occasional tax cut that comes around every once in a while boosting earnings, right, And if you put that all and you can wind up with some wildly different outcomes. Kraft Heins had seven million net income and then at seven seven billion and met income plus a seven billion dollar 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 um John Hampton, 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 say, I'm in the studio with with Chris right now. He does not have a beer. I shaved my beer a couple of 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 um misvalued their potential earnings growth. I guess yes, is the is the short answer. What happens is over a normal long term market cycle, what we have seen, and this again is borne out from data we've looked at, you know, over ninety two years of value investing to show that on average, what happens again is these companies your biomins these incredible discounts. Yes, they come with some distress along the way, some near term distress where um you'll possibly see earnings decline over twelve months, but they'll re essentially get back to a normal earning stream and earnings growth level within three years, and the market will discount those at thirty percent when they should be discounted fiftcent based on earnings. Right, So the idea is, like, what you're getting is that discount over a three year basis of close to five percent a year on average. Now, there are periods of time where that distress gets increased and these companies wind up having it where their priced effectively and growth stocks have the flip side where you know, on average their priced to have this incredible growth of like, but they actually only achieve twenty percent, right, or so they lose five percent on average over those three years. So that's one where again if you look over ninety two 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 one, is that there can be extent periods of time where this gets in burned. 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 twelve fear of under performance, it's fairly unprecedented. How much longer should people be waiting? Well, for us, that's that's 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 with our strategies and value strategies overall. This is one where you know you want to see it revert back in a 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 his formation of oligopolies, where we're seeing these companies that come out the fank stocks winner. If you look at the change in leadership since two thousand seven, the technology stocks are obviously at the top right now. But then there's this also component of call it the companies out are the previous regime starting to adopt, where you're seeing large companies building out their own data science teams um and they're starting to catch up. Right. So the art that was like the call it the shifting moment from the forty one was dieselization of the railroad industry. They basically started and they shifted where before it had been steam engines that I didn't realize that it took like three people a half a day to start up in a railroad like a locomotive instead of turning a key and starting up an engine. So when they shifted to that, they went from again where trucking had suddenly had an economic benefit over railroads to now railroads having economic you know, benefit over or 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 is embedded. Things like the mobile computing platform is is set and standardized, and you're seeing companies like you know, Domino's Pizza, who has been killing it in mobile because they've sat there and they were there 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 they're they're crushing in a mobile platform. You're gonna start seeing more and more of that right where traditional companies are going to be me seeing the benefits of the technology and those values stoction wide about performing didn't Domino 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. Didn't know that. Maybe that's a great story. 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 we'll have to go 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 with the question, when you look at that ninety one 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 that period of underperformance for value while growth actually delivers. What if what if the end looked like so For for me, part of it was established the establishing the form factor for how people are gonna be using this new socio economic 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 gotten 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 have that be a trusted transaction. Uh. The iPhone, he basically shifted that all around. And because if you think about the adoption curve of that and to move people off of the desktop to mobile and to the tablet introducing that as well, and that adoption rate's hard to bleep. But in there was only people with a smartphone, and now it's a of the country and you know, I think something like sevent or under the age of fourteen, So I tells you like pretty much every adult has has a phone right at this point has a smart phone, and they're and they're starting to use it. So that part where and then iPhone sales basically peeked out last year, right, So there's there's part where 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 the deployment phase, and the installation phase is all about setting the standards, seeing the mass adoption, and then comes the after effect to 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 where that form in factor is 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 you know, just pure ratios versus having quality themes that go along with it in other ways to look and again that's where at O'Shaughnessy. What we do is it maybe quantitative, but we look across the entire business. So part of that is looking at the balance sheet, looking at the leveraging side of it, looking at the quality of the earnings, which is are they coming from cash flows, are they coming from things like you know, manipulation of inventoria or depreciation uh, 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 called value traps versus versus UH. You know, growth stocks are value winners, let's call it. I think we did a follow up paper two 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 companies. 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 I have 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 it's on both sides of that. But we 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 underperformed. So, yeah, the losers, those get the first swipe of saying these are 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 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 referred to a period that's a little more normal in which the technology is diffused available to all. Would we in 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 out and have you know, fifty years of out performs and 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 over a rolling call it, one year, three year, five year, ten year period where value has outperformed. Uh. And what we've seen is in that call it in between these technological revolutions, it's had a significant periods of out performance over rolling ten year basis. Like close to mind you on a one year basis, it winds up closer in like a sixty to sixty 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, um very quickly. Is that one thing that you would worry about in this scenario? Actually, I think 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 gonna if you were to call the regulatory risk, it's predominantly on the growth side right now, um, 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 monopolistic where the size of these companies get so big. I mean, if Amazon goes through another growth like it did over the last ten years, obviously it would wind up having with monopolistic anti monopolistic enterprise. But the second one, which I think is going to wind up being perhaps a little mirror, is this idea of um, people starting to understand the trade they're making on their data. UM. 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 who was. It was Durban who who have had proposed the bill in the Senate where they were going to make transparent what people are receiving, you know, for there the value of the information you're giving them. Right, this idea of people are being tracked on their phones, um, 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 gonna have it, where a regulation will come through and create transparent to that and perhaps slow that down. I wanna 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 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 et f s 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 that. First of all, one, I do believe that the original premise that you you said on value investing is right. There are stocks within value that are secular, cyclical, on popular, you know, doom. I like that, I'll keep that one and so that. But there's also healthy companies that are priced at a discount because of near term fears and 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. Uh and and and a good understanding of of picking within value right and understanding which types of stocks you're gonna go for and staying away from the doomed right. So but on the part value that should be an e t F value x doom x doomed. Yes, I like that. So but the the part about ETFs essentially are being this out right where the benefit of value we haven't seen that, right, because what you would expect to see is spread scenario um. And what you would expect to see is is the number one is spread scenaril. 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 gonna 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 it's better than nothing, but there's better value factors that are out there. Um. But overall, we have not seen that there's any sort of any sort of arbitraging way of the value factor from ETFs in those flows. So I have one more question, um, 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 I thought I didn't avoid it. I thought I was. I was just being like that. It's very listening. At the end of the day, it's hard to time. You can't find a specific catalyst where that will 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 none 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 quant which is I've got ninety two years Dad, I don't. I might not have ninety two years of experience, but I have ninety two 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 work growth outperformed value and then it shifted back to value out performing 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 time frames, 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 with those right now, and there's a chance that I believe a strong chance that I will revert back. For the specific catalysts on it, we look to a couple of things. One is going to be that you see the formation of the again, those oligopolies, 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. And what is the economic boon 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 subtraction against Amazon for the first time ever. Alright, well, we're going to leave it there then, Chris Meredith of O'Shaughnessy Asset Management, thanks so much for being on now. Thank you so, Joe. One thing I sometimes think about um 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 produced 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 timed adapting in a recession or lowering their costs. So I often wonder whether or not value investings under performance over the past decade or so is just about people continuously thinking we're late in the cycle. It definitely feels as though the 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 two thousand eleven or maybe earlier. So there probably is something too that I really like the discussion because I think, you know, it helps to uh get into sort of some of the meat and potatoes of what we talked about when we talk about quant stuff or even 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 company, these are doomed and buy the new stuff and sell the old stuff. And it takes a lot of discipline. Um and some might say it's foolish discipline, but it takes a lot of discipline to not just sort of say, oh, there's a new paradigm, you gotta dump everything. 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 twelve 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, Now, 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. This is sort of like the known unknowns quote. We'll have to follow up with Chris and ten years and then I think we'll have a definitive answer to the debate. Well maybe, or maybe we'll still be talking about under performance then who knows? Um? All right, shall we leave it there? Let's leave it there, all right? This has been another episode of the ad Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wisn't All. You can follow me on Twitter at the Stalwart, and you should follow our guest on Twitter, Chris Meredith. He's at Chris Meredith twenty three. And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura m Carlson, as well as the Bloomberg head of podcasts, Francesca Leavi at Francesca Today and check out the new home of Bloomberg podcast on Twitter with the handle at podcasts. Thanks for listening to