In the left corner, we have Paul Merriman, a seasoned finance expert tipping the scales at 183 pounds. On the right, Dr. Karsten Jeske, the determined newcomer at 208 pounds. With the bell ringing, the debate over small cap value commences.
This episode presents a financial showdown between two investment leaders with vastly different viewpoints. Paul Merriman advocates for diversification through the efficient frontier, suggesting the inclusion of small cap value in one’s portfolio. In contrast, Dr. Karsten Jeske expresses skepticism towards this method, preferring simpler strategies such as “VTSAX and chill.”
The implications are significant — potentially millions of dollars at stake in your retirement savings over time.
Merriman maintains that historical data provides strong evidence for the premium of small cap value. Between 2000 and 2009, small cap value consistently outperformed the S&P 500, growing at 10 percent compared to the S&P 500’s negative return of 1 percent. He believes this trend will persist, enhancing diversification when combined with broader market indices.
Jeske responds that the outperformance of small cap value has largely been "front-loaded"— occurring before it became widely recognized. Since 2006, small cap value has lagged behind. He argues that advantages in an efficient market tend to vanish once they are widely known. Integrating small cap value could, in fact, lead to "di-worsification," which complicates without improving returns.
The discussion extends beyond small cap value to address:
Active vs. passive investment strategies
Market timing versus buy-and-hold techniques
Simplicity versus complexity in building portfolios
The balance of faith versus evidence in investment choices
While they disagree on the future of small cap value, both experts concur on basic principles: invest early, maintain long-term investments, and recognize that market predictions cannot be made with absolute certainty.
What initiates as a technical debate gradually transitions into a philosophical conversation about evidence, probability, and the boundaries of our understanding — all with substantial retirement funds on the line.
Timestamps:
(Note: Timestamps may differ on individual listening devices due to variations in dynamic advertising durations. The timestamps provided are approximate and may vary by several minutes because of changing ad lengths.)
(0:00) Introduction of the debate: small cap value versus index funds
(4:01) Merriman’s viewpoint: small cap value delivers premium returns
(9:40) Jeske’s argument: small cap value has underperformed since 2006
(18:20) Importance of historical performance data
(25:15) The implications: a difference of millions over time
(33:08) Debate on diversification versus added volatility
(41:45) Comparison of risk-adjusted returns
(49:08) Scrutinizing genuine diversification benefits
(57:40) Concerns over value traps and actively managed funds
(1:05:08) Comparing technology stocks with value investments
(1:13:45) Addressing data selection bias in research
(1:19:40) Balancing faith and science in investment decisions
(1:29:20) Considerations of personal risk tolerance
(1:36:08) Closing statements on investment strategies
(1:42:08) Paula declares the debate a tie
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In the left corner, we have Paul Merriman, the experienced finance expert weighing 183 pounds. In the right corner stands Dr. Karsten Jeske, the tough newcomer at 208 pounds. The bell rings, signaling the start of the small-cap value debate.