Rob Arnott - "People Need to Ratchet Down Their Return Expectations" | #18
Episode 18 is packed with value. It starts with Meb asking Rob to talk about market cap weighting and its drawbacks. Rob tells us that with market cap weighting, investors are choosing “popularity” as an investment criterion more so than some factor that’s actually tied to the company’s financial health. What’s a better way? Rob suggests evaluating companies based on how big they are instead (if you’re scratching your head, thinking “size” is the same as “market cap,” this is the episode for you). Is this method really better? Well, Rob tells us it beats market cap weighting by 1-2% compounded.
Key Points
- Rob Arnott discusses the inefficiencies of market cap-weighted indexing and introduces the concept of fundamental indexation, which weights companies based on their economic size rather than market valuation.
- Arnott explains that smart beta strategies can add value by breaking the link with stock prices, but warns that even good strategies can become overpriced, leading to poor future performance.
- In a low-return environment, Arnott suggests improving portfolio returns through broad diversification into non-mainstream markets, utilizing strategies like fundamental indexation, and actively managing asset allocation to capitalize on markets that are out of favor and undervalued.
Follow Rob: Website
Resources: Research Affiliates RA X The Fundamental Index: A Better Way to Invest – Arnott CommonFund A few Arnott papers on SSRN Rob Keynote at UCLA Meeting of the Minds Too Big to Succeed - Arnott The Biggest Urban Legend in Finance – com Selection Bias – Arnott Why You Should Invest Based on Sustainable Spending – Arnott Sustainable Investing in a Low Return World - Arnott Why You Have Way Too Much Invested in US Stocks - Faber Lots of RA publications can be found here, and a short list is below: Mind the (Expectations) Gap: Demographic Trends and GDP¹ - Arnott Research Affiliates Asset Allocation Module - RA To Win with “Smart Beta” Ask If the Price Is Right - Arnott Beware of Rising Valuations in Smart Beta - RA How Can “Smart Beta” Go Horribly Wrong? - Arnott Rip Van Winkle Indexing - Arnott Are Stocks Overvalued? A Survey of Equity Valuation Models - Brightman Woe Betide the Value Investor - Hsu
Chapters
| 0:00 | |
| 0:27 | |
| 1:04 | |
| 1:39 | |
| 11:28 | |
| 17:42 | |
| 30:43 | |
| 44:28 | |
| 48:32 | |
| 57:51 | |
| 1:03:02 |
Transcript
Loading transcript...