"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." -Benjamin Graham

Once it clicks, it all changes and you never go back. Everything we do now is models.

In 2026, $AVSC is +20.01% vs +13.53% for VOO. The return of small cap is well underway.

The 1970s SCV boom happened because large caps in the "Nifty Fifty" were priced for perfection while small value was priced for doom. A similar valuation gap exists today with Large Cap Growth trading near historically high multiples, while SCV trades at a substantial discount relative to history. In an inflationary regime driven by supply shocks or resource scarcity, companies with physical assets, capital goods, and pricing power in real world commodities like industrials, energy, and materials retain margins far better than software or consumer platforms facing input cost inflation.

The factor valuation spread between Value and Growth styles remains at historical extremes, with the most acute structural dislocation occurring within International Developed Small Cap Value. Key empirical observations from cross sectional valuation data prove this out. For example, on a Price to Forward Earnings (P/FE) basis, non U.S. Value trades at an approximate 43% discount relative to non U.S. Growth, staying anchored near levels last observed during the peak of the 2000 bubble. Within non U.S. equities, International Small Cap Value exhibits a compounding factor discount across size, style, and geography, trading at a forward P/E of 9x compared to 22x for International Growth. Non U.S. developed equities maintain positive real FCF yield spreads over 10 year sovereign bond yields contrasted with negative real FCF spreads in U.S. megacap benchmarks. Empirical asset pricing research indicates that starting relative valuation spreads in the top decile are strongly correlated with forward multi year factor outperformance. Driven by multiple mean reversion expectations, solid underlying FCF generation, and elevated dividend yields, non U.S. Value offers an asymmetric risk adjusted return profile. To take full advantage of this valuation gap, it is important to use a multi factor based methodology that captures size, profitability, and value. While many providers offer compelling strategies, my personal choice is $AVDV by Avantis. I believe this fund has a unique combination of academic rigor, combined with proven execution, and low costs, to target above average forward returns from International Developed Market Small Cap Value stocks. The chart below shows the P/FE (next 12 months) since June 1999. Based on MSCI EAFE Value Index, MSCI EAFE Growth Index and MSCI EAFE Index, representing the broad market, and demonstrates the historical gap in valuation.

Value investors, take note!

Most factor allocation models treat value as a size segregated asset class, over allocating to Small Cap Value (SCV) to maximize raw value (HML) factor density. However, rigid size partitioning introduces severe microstructure drag, index rebalance friction, and taxinefficient turnover. An unconstrained Multi Cap Value framework resolves these implementation inefficiencies. While SCV carries strong SMB and HML loadings, it exhibits extreme tail risk during high yield spread widening and rate spikes due to balance sheet refinancing exposure. Blending large cap value's defensive cash flow yield creates cross cap covariance diversification that lowers portfolio variance and raises the Sharpe ratio over full market cycles. Removing market cap silos provides a microstructure efficient approach to harvesting the value premium, driven by graduation retention, reduced rebalance loss, and unconstrained cross cap factor optimization.

The structural preference for debt over equity in modern corporate finance is fundamentally an artifact of path dependency. In his latest for @AmAffairs, Daniel Peris demonstrates how an emergency tax policy under the Revenue Act of 1918, designed to mitigate wartime excess profits taxes, permanently distorted capital allocation. By maintaining the corporate interest deduction while double taxing equity, the U.S. institutionalized a systemic leverage bias by accident rather than economic design. Reevaluating this tax shield is essential as post neoliberal financial architectures take shape. americanaffairsjournal.org/2…

Ben Graham, originally defined value investing as buying securities at a significant discount to their intrinsic value to create a margin of safety. This definition has radically changed over time, as passive investors have sought to define value as merely the cheaper half of an index. Quantitative factors have further tried to slice and dice indicies into varying portfolios of "value" which can be defined using traditional price/book measures or more complicated measures that combine factors like value and profitability. In this piece, Daniel Peris, reviews the creation and usage of value indicies as an appropriate benchmark, and questions the notion of what constitutes value and challenges he sees with passive investing style indicies: "The large-cap equity universe is not limited to the value-growth binary. There are investors focused on current cash returns, on dividend durability and growth, on balance-sheet conservatism, on governance and capital allocation, and on a range of other business characteristics that do not fit naturally onto a single line running from “value” to “growth.”" Reformulation of Value: "Second, any honest reformulation of measuring value in the present environment should contend seriously with cash returns. Graham’s original intrinsic value calculation placed considerable weight on dividends and real distributable earnings. Instead, during the past forty years, buybacks have supplanted dividends, and capital gains have become the dominant currency of equity return. Value investors can determine the proper role of the buyback phenomenon in a new system of measurement." This piece is worth the time to read it in its entirety, especially for factor investors who believe dividend investing is just an inferior form of value. Peris looks at what it means to be a dividend investor in a stock market: "There are investors focused on current cash returns, on dividend durability and growth, on balance-sheet conservatism, on governance and capital allocation, and on a range of other business characteristics that do not fit naturally onto a single line running from “value” to “growth.” (A Dividend Investor in a Stock Market belongs in that broader field, not as a subset of value by default, but as a distinct discipline with its own objectives, opportunity sets, and standards of success.)" danielxperis.substack.com/p/…

Cherry picking a 2000 start date compares stocks at their most expensive with gold at its cheapest. The comparison also uses a price only index which ignores dividend reinvestment, that accounts for the majority of the return from stocks. Expanding the view to the full 1871–2026 dataset shows that productive corporate assets with dividend reinvestment dramatically outpace physical precious metals over long horizons.

“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” -Charles Dickens