Stock Indexing Empire Strikes Back
By Arnold Kling
We concede that there is some evidence, based on numbers compiled by Ibbotson Associates, that long-run excess returns have been earned from dividend-paying, “value” and small-cap stocks — albeit returns that are overstated by not taking into account management fees, operating expenses, turnover costs and taxes. But to the extent that investors are persuaded by these data, the premiums offered by such stocks may well now have been “arbitraged away” in the stock market, as price-earnings multiples have become extremely compressed.
We are impressed by the inexorable tendency for reversion to the mean in security returns. . .Since the late 1960s, “value” funds have generally outperformed growth funds. But since 1977 — indeed since 1937 — there is little to choose between the two. Indeed, for the first 30 years, growth funds rather consistently trumped value funds. Never think you know more than the markets. Nobody does.
Bogle and Malkiel introduced the financial world to index funds. Malkiel’s Random Walk Down Wall Street is still one of the best introductions to the stock market. They are responding to Jeremy Siegel’s piece that I blogged here.