Let me first define the term “small cap value premium.” It’s an observation (and indeed historical fact up until about five years ago) that small cap value stocks outperform large cap growth stocks in a rather consistent manner. 

In academia, there are two theories attempting to explain it: 1) risk-based and 2) behavior-based.

The risk-based theory was pioneered by Nobel winner Eugene Fama, who argued that small cap value stocks are inherently riskier than large cap growth stocks, thus they deserve higher returns to compensate for higher risks. 

The behavior-based theory was not necessarily pioneered by anybody, but another Nobel winner Robert Shiller is considered the representative figure. This theory argues that investors systematically under-appreciate the true values of small cap value stocks since they are usually not glamorous and don’t get the same amount of press attention. Buying these under-priced stocks leads to higher returns.

By both theories, the small cap value premium should return sooner or later since both assumptions have not changed: small cap value stocks are both riskier and are still generally underappreciated by investors. 

Using the same lenses to examine large cap growth platform stocks, we might have to come to the conclusion that their recent outperformance may not persist into the future. The outperformance might be driven by the gradual market realization that platform stocks have natural monopolistic power. Once this knowledge is fully priced in, there are no other persistent factors to drive their outperformance. 

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