Excess Returns The Bubble You Can't Short | Rob Arnott on What You Can Do Instead
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Nov 19, 2025 
Rob Arnott, founder of Research Affiliates, shares his insights on market bubbles, emphasizing how narrative drives pricing and cautioning against shorting them. He draws parallels between the current AI-driven market and the dot-com era, highlighting practical strategies for concerned investors, like diversification and focusing on value stocks. Arnott also discusses the challenges of AI monetization, the importance of historical context in investment strategies, and his preference for emerging market opportunities and fundamental indexing over traditional methods.
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Real-Time Definition Of A Bubble
- A bubble is when today's price demands implausible (not impossible) growth to justify it and buyers ignore discounted cash flows.
- Marginal buyers in bubbles care about the narrative, not fundamentals, so bubbles are asset-by-asset.
Dot‑Com Lessons Still Apply
- Many dot-com era giants underperformed for decades; disruptors often get disrupted over time.
- Narratives accelerate prices but often overstate speed and permanence of change.
Use Fundamental Indexing To Trim Froth
- Use fundamental indexing like RAFI to downweight froth and capture rebalancing alpha.
- Trim winners and top-up unloved names to turn volatility into alpha and reduce concentration risk.