Yuval:
In my opinion your first two points are very plausible, and your final one is an absolute certainly.
From a logical and behavioral perspective point 3 has to be true — if a model or group of related models did not have “a blue streak … some long periods of underperformance” then everybody along with all their siblings and cousins would eventually be using the model and it would then stop working for — and this is key — stop working for long enough to get the majority of people to stop using it. At that point it would have a good probability of starting to work again.
Put in other words, if a method is going to work over the long term it has to inflict enough pain, from time to time, along the way to get most people to quit. It is a variation of “no pain, no gain”.
Our data only goes back to 1999, but I’ve heard some who have access to data from the 1990s say that value and small caps did not work very well compared to the growth and larger caps during that period. From that perspective it is not surprising that the typical P123 portfolio (mine included) back tested very well from 2000-2002 (general bear market for the large indexes and range bound for the R2000) and continued to do outstanding well for 2003-2007. Many of our models did well for 2009-2017. Our methods are currently in a 1.5 year period of painful underperformance.
Will this period of underperformance be over in 3 months or 3 more years. I have no idea of the duration but I believer it will need to be long enough and painful enough to get the majority of money to stop using the types of value and small cap models that worked will in the past.
Well that’s my 2 cents.
Brian