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The Meb Faber Show - Better Investing
Rob Arnott on The Upside of Getting Dumped: Investing in Index Deletions | #549
Sep 13, 2024
Rob Arnott, founder and Chairman of Research Affiliates, shares insights on investing in stocks that have been dropped from major indexes, a strategy highlighting their potential for high returns. He discusses the extraordinary performance of these 'dumped' stocks and how they often represent deep value opportunities. The conversation also touches on the current market dynamics, the allure of AI narratives, and the impact of macroeconomic conditions on small-cap investing. Arnott’s expertise sheds light on navigating today’s complex investment landscape.
51:41
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Quick takeaways
- Investing in stocks removed from major indexes can lead to significant outperformance, offering an opportunity for deep value investments.
- Current market conditions suggest that small-cap and value stocks may outperform large-cap growth stocks, emphasizing contrarian investment strategies.
Deep dives
The Value of Indexing in Investing
Indexing remains a fundamental strategy in investing, though it is often misconceived as a completely passive approach. When stocks are added to major indexes, they tend to be those that have seen significant price increases, triggering a cycle where these stocks are overvalued upon their addition. Conversely, stocks that are removed typically undergo a decline in value. This dynamic underscores a critical observation: newly added stocks usually underperform in the subsequent year, while those removed tend to rebound, highlighting the cyclical nature of indexing.
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