We Study Billionaires - The Investor’s Podcast Network

TIP688: Long-Term Market Cycles w/ Rob Arnott

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Jan 3, 2025
Guest
Rob Arnott
In a riveting discussion, Rob Arnott, founder and chairman of Research Affiliates, shares insights on the Fundamental Index and its impressive two-decade performance. He breaks down the complexities of the equity risk premium and explains why long-term forecasts hold more value than short-term ones. Rob also discusses the current value cycle and highlights intriguing trends, such as how companies removed from the S&P 500 often outperform those added, showcasing the nuances of market dynamics.
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INSIGHT

Cap-Weighted Indexing Flaw

  • Cap-weighted indexing overweights overvalued stocks and underweights undervalued ones.
  • This is because weights are tied to price, creating a missed opportunity.
INSIGHT

Alternative Weighting Schemes

  • While identifying overvalued or undervalued stocks is difficult, some are undoubtedly mispriced.
  • Non-price-based weighting methods can cancel out these errors, unlike cap-weighting, which magnifies them.
ANECDOTE

Sun Microsystems' Valuation

  • In 2002, Scott McNealy questioned the high valuations, citing Sun Microsystems' 10x sales multiple as preposterous.
  • He argued that even with unrealistic assumptions, justifying such a multiple was impossible.
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