This podcast explores why small-cap value stocks have historically outperformed large-cap growth stocks, a trend backed by data since 1926. The speaker, who collaborated with Nobel laureate Eugene Fama, identifies several reasons for this outperformance: small caps typically carry a higher risk premium, receive less analyst attention leading to pricing inefficiencies, often experience mean reversion when undervalued, and tend to perform well during economic upturns. While this investment strategy can yield impressive returns, large institutions face challenges in implementing it due to scale constraints. The speaker recommends building a diversified portfolio that includes a significant allocation to actively managed small-cap value stocks, along with a carefully balanced approach to larger caps and international equities. He also highlights the critical role of active management in small-cap investing and encourages a thoughtful consideration of fee structures.
