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
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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.
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.
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