We Study Billionaires - The Investor’s Podcast Network

TIP688: Long-Term Market Cycles w/ Rob Arnott

Jan 3, 2025

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.

01:05:42

Episode guests

Rob Arnott

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Episode notes

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Quick takeaways

The Fundamental Index, which emphasizes company fundamentals over market capitalization, has historically outperformed the S&P 500 by about 2% annually for two decades.

Rob Arnott identifies that the equity risk premium is currently modestly negative, challenging commonly inflated investor expectations around stock performance versus bonds and cash.

Arnott suggests we may soon see a reversal in the value cycle, with value stocks potentially outperforming growth stocks due to their current undervaluation.

Deep dives

Fundamental Index Strategy

The Fundamental Index, developed by Rob Arnott, prioritizes weighting companies based on their business fundamentals rather than market capitalization. This method arose from concerns about the inefficiencies in traditional indexing, where overvalued stocks could dominate portfolios due to their market price. Historical data show that the Fundamental Index has outperformed the S&P 500 by approximately 2% annually over two decades. By focusing on fundamentals, this strategy also introduces a value tilt, emphasizing undervalued stocks while de-emphasizing growth stocks that may be overhyped.

Intro

2min

Revolutionizing Indexing: The Power of Fundamental Metrics

15min

Understanding Equity Risk Premium and Related Myths

4min

Market Valuations and Expectations

15min

Market Dynamics and Real Estate Simplified

6min

Navigating NVIDIA's Financial Landscape

9min

S&P 500 Dynamics and Investment Strategies

11min

On today’s episode, Clay is joined by Rob Arnott to discuss the Fundamental Index, the equity risk premium, and where Rob believes we’re at in the value cycle.

Rob Arnott is the founder and chairman of the board of Research Affiliates. Rob plays an active role in the firm’s research, portfolio management, product innovation, business strategy, and client-facing activities. He is a member of the Executive Committee of the board. Rob is co-portfolio manager on the PIMCO All Asset and All Asset All Authority funds and the PIMCO RAE™ funds.

Over his career, Rob has endeavored to bridge the worlds of academic theorists and financial markets, challenging conventional wisdom and searching for solutions that add value for investors.

IN THIS EPISODE YOU’LL LEARN:

00:00 - Intro

02:02 - What the Fundamental Index is and how it has performed over the past two decades

16:32 - How to calculate the equity risk premium

23:44 - Why short-term forecasts are impossible to project accurately, but long-term forecasts are not

27:50 - Where Rob believes we are in the value cycle

44:03 - Why companies that get removed from the index tend to outperform those that get added

49:21 - How companies get added to the S&P 500

And so much more!

Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.

BOOKS AND RESOURCES

Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members.
Check out the Research Affiliates.
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