Can Value Investing Still Outperform in an AI-Driven Market?

During their recent episode, Jake Taylor and Tobias Carlisle discussed Can Value Investing Still Outperform in an AI-Driven Market? Here’s an excerpt from the episode:

[Tobias] Right. And it felt like we turned the corner a little bit before the AI trade. I mean, I thought we found like a generational bottom, and then the AI trade has reversed all of that and we’re further behind than we’ve ever been.

So it’s incredibly frustrating, and I do understand what he’s going through. But I still feel like the tried and true value meets quality. I don’t need it to work on an empirical basis, because I feel like it works.

It just makes sense that if you buy different return streams, you pay more for one and you pay less for the other. You do better paying less for the return stream.

[Jake] Yeah. Well, you’ve got that confluence of the AI trade, which I think we’ll talk more about. And then you add indexation on top of that with the flows, where if the small cap value managers getting fired kind of regularly, they have to punch out to liquidate.

And then that just goes into an index or into the growthier, the people smart enough to know where AI is going. And that just kind of feeds on itself continuously until at some point it has to stop. But only God knows when.

[Tobias] And indexation is an interesting one, because I like to look at the 100, the S&P 100. So it’s the biggest 100 results versus the 500. And that reached an all-time high in 2021, reached a new one in 2024.

And it has come back a little bit in, ran up again in 2025, has come back off a little bit since then. And then the equal weight, which is small caps, basically small caps versus large caps. I think they’ve both come back a little bit in recent times, which I think is kind of interesting.

I do feel like actually Meb Faber had a great tweet where he pulled out some research. It’s the Besson binder paper, a new Besson binder paper.

[Jake] Yeah.