#590: In the left corner, we have Paul Merriman, the seasoned finance veteran weighing in at 183 pounds. In the right corner, Dr. Karsten Jeske, the scrappy newcomer at 208 pounds. The bell rings, and the small cap value debate begins.
This episode features a financial boxing match between two investment heavyweights with dramatically different perspectives. Paul Merriman champions diversification through the efficient frontier, which means adding small cap value to your portfolio. Dr. Karsten Jeska has "thrown cold water" on this approach, favoring simpler strategies like "VTSAX and chill."
The stakes are high — we're talking potentially millions of dollars in your retirement account over decades.
Merriman argues that history shows clear evidence for small cap value's premium. From 2000 to 2009, small cap value outperformed the S&P 500 in all but one year, compounding at 10 percent while the S&P 500 returned negative 1 percent. He believes this pattern will continue, creating a powerful diversification effect when combined with broader market indexes.
Jeska counters that small cap value's outperformance is mostly "front-loaded" in history, happening before anyone knew about it. Since 2006, small cap value has underperformed. He argues that once an advantage becomes widely known, it disappears in an efficient market. Adding small cap value might even be "di-worsification" — increasing complexity without improving returns.
The debate expands beyond small cap value to touch on:
- Active vs. passive investing strategies
- Market timing vs. buy-and-hold approaches
- Simplicity vs. complexity in portfolio construction
- The role of faith vs. evidence in investment decisions
While both experts disagree about small cap value's future, they agree on fundamentals: invest early, stay invested for the long term, and understand that no one can predict markets with certainty.
What starts as a technical debate evolves into a philosophical discussion about evidence, probability, and the limits of our knowledge — all with millions of retirement dollars hanging in the balance.
Timestamps:
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(0:00) Debate intro: small cap value vs index funds
(4:01) Merriman: small cap value offers premium returns
(9:40) Jeske: small cap value underperformed since 2006
(18:20) Historical performance data significance
(25:15) Stakes: difference of millions over time
(33:08) Diversification vs added volatility debate
(41:45) Risk-adjusted returns comparison
(49:08) Questioning true diversification benefits
(57:40) Value traps and actively managed funds
(1:05:08) Technology stocks vs value investments
(1:13:45) Data selection bias in studies
(1:19:40) Faith vs science in investment decisions
(1:29:20) Personal risk tolerance considerations
(1:36:08) Closing arguments on investment strategies
(1:42:08) Paula declares the debate a draw
For more information, visit the show notes at https://affordanything.com/episode590
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