Extremes

For at least a couple of years I've come across articles/commentary about how value has under preformed growth so much that it's just a matter of time before this trend reverses in favor of value. But it  hasn't happened and the disparity of growth outperforming value has carried on. We saw last year in September though a brief hiccup where growth got sold off in favor of value because in retrospect you could see that too many actively managed funds were leaning in the same direction. This tends to happen now again wherever there's been a strong trend in place. Even if the fundamentals are still supportive of the trend, if too many people get on board you will get a violent shakeout/rug pull to clear out the excesses before the trend can resume. The problem with value stocks in general is that they simply have had chronically weak fundamentals in general. The largest space in the value sector is financials which have had their margins squeezed due to the flattening yield curve over the past few years. You also have industrial and materials names which have been hampered by lack luster manufacturing and low commodity prices respectively. Meanwhile on the growth side led by tech, you have primarily service type businesses that have been growing steadily year after year, not impacted much by the slowdown in manufacturing and benefiting from low interest rate environment on all parts of the yield curve. The value proponents will say that at some point these trends have got to reverse and so you have to buy now. The problem is that they've been saying this for at least 2 years and have been getting run over in the process. When I studied for the CFA designation they discussed something called chronic inefficiencies which basically means that an asset can be mispriced for a very long time, long enough to make the endeavor of trying to profit from the mispricing fruitless or even worse leading to ruin. Extremes can get to ever further extremes....there's really no limit as to how long or how high a trend can go on for. Just look at bitcoin as an example. Which is why if you are looking to make a bet on a long term trend reversal you need to see evidence of the turn taking place which means you may very will miss out on the first 6 -12 months, but that's OK because the new trend will likely last for several more years. And here's a little secret....when the long term trend does reverse it will be met with heavy skepticism and most of the bottom callers will probably had given up making bottom calls as they were burned so many times. At the bottom of a multi-year downtrend there will be silence, there will be apathy.