YouSaid · the spoken record

Rob Arnott

lines on the record: 56
first: 2025-01-03
most recent: 2025-01-03
sittings or episodes: 1
sources: podcast

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“And emerging market stocks look pretty good. Aren't I aware that international and emerging markets have fallen far behind the US? Yeah, that's why they're cheap”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Firstly, if you go to our website, there's a ton of information. We've written, I'm going to scare your audience off, we've written 400 journal articles in the last 25 years. And a lot of that is readily accessible. We have asset allocation interactive, which is an interactive tool that helps you look at multiple asset classes around the world and ask, where's the opportunity? Spoiler alert, the opportunity is not so much in U.S. large cap growth stocks or in mainstream U.S. bonds and cash. Those are priced to give you, call it 3% to 5% returns. If you want good returns, it's an opportunity-rich environment because there are markets that are priced really pretty cheap all over the world. They're just not U.S. stocks and bonds. So U.S. value looks pretty good. Small cap looks pretty good. Small cap value looks very good.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Capital. And you just piggyback along and pay almost nothing. But on the other hand, it's not without its vulnerabilities and it does leave a rebalancing alpha on the table with RAFI captures. And it does add frothy stocks and drop on love stocks, which mixed captures. So these are all kind of interconnected. It's fun stuff.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Is passive. They are passive. When a stock's in the index, it stays there and its weight in the index moves up and down with price. And the only thing that'll change that is if there's new shares issued or a stock buyback. But basically it's passive, except at the bottom of the list where stocks are added and dropped. And there it's very active with massive trading costs. And thank God the turnover is so low because those massive trading costs are multiplied by three to five percent turnover, which is tiny. So it costs tens of basis points, and you can recapture that. You can recapture that by trading late. You can recapture that by constructing the index in a different way. So indexes are a wonderful thing in terms of allowing you to be a free riot. Let the market do price discovery for you. Let the market decide where to allocate.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Fifth quarter comes along, pressures intense, they've got to do something. And so they decide to add it in one fell swoop in December of 2020. Well, between the decision date, which was late November and the addition date, which was mid-December, the stock was up well over 40%. But roll the clock back to March, it was up something like 250%, all on the back of not fundamentals shocking to the upside, although they were showing an ability to turn a profit, which is cool, but based on the narrative that this stock is going to get added and there's going to be 25% of its total market cap is going to have to change hands and one fell swoop. So I'm not critical of S&P's methodology. I'm not critical of Russell's methodology. I would say that the cap-weighted indexes claim to be passive. People think of them.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“The Russell 1,000, the process is formulaic. If it's, I think if it gets into the top 900 by float or out of the top 1100 by float, it's added or dropped. Something like that. Or S&P, it's a committee decision. Tesla's a beautiful example. March of 2020. People started to speculate that Tesla, which had just finished its third profitable quarter in a row, had been unprofitable quarter by quarter year by year since inception. And suddenly it was profitable three quarters in a row. And they knew that S&P wouldn't add it without four-profitable quarters in a row. And so people in March began to say, wow, this is about to be added. And it's big. So people started buying it fourth quarter profits is reported. S&P is kind of paralyzed. They aren't sure what they want to do.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“So, the turnover associated with additions and deletions is lower for RAFI than it is for Capway. There is a rebalancing component that adds back into the turnover, but one of the beauties of all of this work is all interconnected. There are vulnerabilities in the way cap waiting works, and that's not to say cap waiting.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Really simple question What happens if SP makes a change? You write it on a post-it note, you stick it on your fridge, and a year later you do the trade. You end up with 20 basis points higher returns than the S&P because you don't participate in that huge melt up in price and meltdown in price on the deletions. Well, NYX captures one side of that. And RAFI captures both sides of that because you own companies. You're going to add a company long after a cap-weighted index adds it because a cap-weighted index will add it when it's frothy, expensive, popular, beloved, but still a small company. And RAFY will add it when it's proven its merit and is now a big company. Deletions, stocks get kicked out of the cap weighted index before they're small companies. When they're small cap and get kicked out of RAFI after they're no longer big company.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Your first question How big are indexes as a share of market cap? I think it's in the ballpark for SP 500. I think they own somewhere in the ballpark at 25% of the total market cap of every stock in the S&P 500 and of course zero of every stock that's not. So if a stock is added to the index they have to go from zero to own 25% of the total market cap of the company. And if it's dropped, they have to go from owning 25% toning zero. A lot of them will want to do that trade in a market on closed block trade on the effective date to lock in exact matching of the index. And they don't care if hedge funds have pushed the price up on the addition or push the price down on the deletion because they're trying to lock in zero tracking error. Well, that's too bad. The 2017 paper we posed a”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“The exact price at which it's added or dropped from the index. Back in 1986, they couldn't do that. It was not pre-announced. It was announced typically on a Wednesday right after the market closed, and the effective price was the one that had just closed. All right, so that meant index funds moved the prices and therefore underperformed the indexes that they were tracking and lobbied aggressively. Come on, guys, pre-announce this so that we don't have to underperform. And these days, some of them say, see, we don't move prices. No, they do, not they themselves, but the hedge funds that run those trades and then flip the stocks to the index funds. They're leaving money on the table. Quite a bit of money. So the process of adding and dropping companies is a big deal. It's getting bigger and bigger because index funds are getting bigger and bigger. I don't have the number for you.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“And that's a beautiful thing. So the 2017 paper, Buy High and Sell Low with Index Funds, pointed out, firstly, that when you buy in an index fund, typically you're going to be buying a frothy company that's expensive and you're buying pressure will push it higher. If you sell, get rid of a company, typically your selling pressure will push it lower. And that gap is about 16%. Indexes do most of their trading in a single block trade on the change date, the effective date. Why? Because they've trained the world to see tracking error relative to the index as a sign of incompetence. So even if the tracking error is positive, shame on you. It could work negatively next time. So you're clearly not competent. So they are much more interested in locking in.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“We've documented this again and again. I did a paper back in 1986 entitled S&P Editions and Deletions of Market Anomaly. And my understanding is that S&P actually used that paper or S&P indexers used that paper to lobby S&P to pre-announce editions and deletions, which they started doing in October of 1989. In that paper, I showed that additions outperform in the immediate aftermath of being added by 5% or more and deletions underperform by 5% or more. Might not have been five each way. I think the total gap was about eight. The gap by 2017 was now 16%. So additions win and deletions lose by about 16% relative to one another. So that stretching of the rubber band snaps back in the after.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Index funds have dumped it. Index funds when they may sell, they have to sell to active managers. Active managers don't like these companies. That's why they're cheat. So they have to sell to companies that active managers who don't want it. And so it exits the index abnormally cheat. And that's part of what sets the stage for the subsequent tenancy for outperformance. It wins historically testing it back over the last 30 years wins about half of the time 15 out of 30 years give or take. But when it loses, it loses by about 5%. And when it wins, it wins by about 18%. That's an asymmetry that I love.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Out of favor and unloved and dirt cheap, it's gone. So when we look at the 150 names, Lumen was one of them, and that single stock has given us over 200 base points of alpha because it's quadrupled as a share of the index in just a few weeks. That's cool. That's fun. And you don't need a lot of examples like that out of 150 names. It's not the only one that's more than doubled. And so you just need a handful of companies that regain their footing to beat small cap value, which is the appropriate benchmark for NIXT. ETF Architects is a company that launches ETFs and they launched an ETF based on the Nix Index back in early September. And it's still small, but it's very powerful way to access a part of the market that has no natural loans.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“With matter about 8, 10, 12 weeks ago to help matter beef up their AI capabilities. And so the stock is up 550% since June. Well, that's pretty cool. We hold stocks for five years. Why? Because it's a persistent trend. It slows during the five years. I mean, it starts out 7% a year and then it's 2% or 3% a year. And so we give it up after five years. Stocks deleted over the last five years from the top 500 or top 1000. There's 150 of them. And we equally weight them. Basically, we're playing a game not unlike fundamental index. These companies tumble in market cap, market value, but they're still not small companies. And the result is fundamental index chooses companies based on how big the business is and then weights them on how big the business is. Cap weighting doesn't matter the size of the business.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Thousand very similar to the Russell 1000. We did research on those two indexes and we found that the stocks dropped by those indexes on average outperformed by 28%, 2800 basis points over the next five years. That's a big margin of victory. It doesn't matter whether you use S&P or Russell or a filter of top 500 and top 1000. The mechanism for dropping a stock is the same. It's out of favor. It's plunged in valuation multiples. It's plunged out of your target market cap range and is replaced with a frothy high flyer. And so we launched the index in end of June. There's a stock lumen that was dropped by the S&P in, I believe April of 2023, dropped by the Russell Index in June of 2023, and signed the major contract.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Well, firstly, the title is obviously a whimsical one, the upside of getting dumped. I'm reasonably sure you've never experienced getting dumped, but I have, and most of us have. If you get dumped, you can wallow in self-pity for life, or you could pull your socks up and move forward and learn lessons and seek to do better next time. Okay, companies can do the same thing. If a company gets dumped from the S&P, it's a troubled company. It's out of favor. It's unlugged. It's cheap. I like to joke it may go on to achieve great failure. Or it may get its act together and it's not priced for that. It's priced for continued struggles and perhaps oblivion. We created the index next in end of June. And the goal is to find stocks dropped from the largest 500, very similar to the S&P and the largest.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Say, I want some graphic arts to Dolly and describe roughly what you want, and it'll spit out 10 images that are interesting. It's going to change our world, but the leaders of today won't necessarily be the leaders of tomorrow, and they will have competition. There will be price compression.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Wang was an absolute genius in saying these super chips that we're about to build, let's leave some dead real estate on them for future innovations. And his team pushed back and said, what are you talking about? That's waste. And he said, no, we're going to need it. And sure enough, the innovations filled in that space and they were instantly the dominant player in superchips. Well, that's very cool. And AI is very cool. Anyone who's played around with the AI tools has been around forever. I was doing neural nets in the 1980s, but they weren't very useful back then because the compute power wasn't large and the data that you need massive data. The new phenomenon is user-friendly AI. And the AI that's at our disposal now, average person doesn't have to be a nerd. You can just pose a question to ChatGPT.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Profit margin like they had last quarter, they're down to 30% profit margin. Plug those numbers in and what you find is that the earnings in 2034 are almost identical to the earnings in 2024. Now that's shocking. It's shocking to people who haven't thought about it in those terms. The simple fact is often bubbles are blown based not on a flawed narrative but on narrative overreach. The competition is not sitting on their hands. AMD already has chips that are as fast as NVIDIA's fastest. Why don't people switch because the price is one-third as much? They don't switch because you've got to reprogram everything. And so switching is not easy. Switching can happen over the course of two, three, five years. And so I look on NVIDIA as a beautiful company with a great vision and”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“The narrative about NVIDIA is this company is changing the world, and it is. This company dominates the super chips market that in turn dominates AI. $100 billion annual sale, $60 billion annual profits. That's phenomenal. But the narrative is AI is going to be a big part of our future. The sales are going to keep soaring. Absolutely true. If you model it out and if you assume, let's say 30% growth in sales per annum compounded for the next decade, are the competitors going to sit on their hands? I don't think so. Is the price going to stay $40,000 per chip? I don't think so. So let's speculate on a future where the growth, the unit growth is 30% a year. But instead of 90% market share, they got 40% in 10 years. Instead of 50%,”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“There are some who think, oh my God, carry my wing. I want to get out of the market. And when the election happens, one side or the other is relieved, and the ones who were so alarmed that they got out of the market are coming back in. So, my suggestion is, wait, no matter who wins, I predict the market will go up. And six, eight weeks after the election, let's have another conversation if you want out. Let's take you out. The bottom line is that's a fairly persistent pattern. And it's kind of a fun one, no matter where you sit politically, somebody on the other side of the spectrum shares your sense of alarm about what's coming. I mean, every election is portrayed as the most consequential of our lifetimes. Every election that's ever happened, the countries survive just fine over the next 40 years. So rather than being alarmed, look for opportunities. It's kind of fun.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“That there's also the political effect a lot of people think that reducing the burden of regulatory overreach may be in the cards. The other political element that's a fun one, I wrote a paper eight weeks before the election in which I showed that with contentious elections, the stock market rallies from a few days before the election for the next four to six weeks, no matter who wins, It doesn't matter who wins. I had a billionaire client in 2004, very recognizable name, who was a big donor to Democrats, and he came to me just a few weeks before the election, and he said, I'm getting scared. I think GW could win. And I want to pull out. I want to get out of the stock market. And my comment to him was, there's people on both sides who feel that way.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“In the way we all behaved 2024 is very different. And the same thing will happen with AI. I think five years from now, it'll be making noticeable strides, but it's not going to be an unrecognizable world. 2050 might be an unrecognizable world to those of us here today.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Blackberry was already on the scene, and BlackBerry went on to have dominant market share in handheld devices by 2008 and 2009. And then the iPhone, which came along in 2007, disrupted BlackBerry. So you had sequential disruptions. Google disrupted other search engines. Ask Jeeves, remember Ask Jeeves? So the whole notion that these companies have a lock on the future is dangerous. Disruptors get disrupted. The whole notion that the world will embrace AI fast is a little dangerous. AI is going to be huge, but it's going to take time because people embrace change slowly. Loddites will want to slow it down, but it's very nature will be to happen fast, but human nature is to embrace change slowly. So I'm guessing, just like the internet, 2005 was very similar to 2000.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Very similar to the dot com bubble in burst. In the dot com bubble, the narrative was these companies are building a new future. They're creating the internet and the internet's going to be huge. It'll change how we buy and sell goods and services. It'll change how we communicate with our clients and with our friends. It'll change how we socially interact. It'll change how we get our news. All true narratives have the advantage of being mostly true. What wasn't true was the narrative went on to say this is going to happen astonishingly fast. And these companies are going to be the leaders 10 years from now too. And disruptors get disrupted. Palm was briefly worth more than General Motors in 2000. Does anyone have a Palm pilot anymore? Does anyone have anything that vaguely resembles a palm pilot or is made by the company anymore? Of course not. It was disrupted by BlackBerry.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“They often turn with a catalyst, but not always. I've asked the question, what was the catalyst that burst the dot-com bubble other than gravity? Things were too high. I've heard a lot of answers, but none that were totally satisfying as something that could cause a complete crash of growth stocks. So I think it was overwhelmingly just gravity. But usually there's a catalyst, and the funny thing about catalysts is that by definition they're a surprise. If it's not a surprise, it's not a catalyst. So it's kind of a fun parlor game to ask the question, what could be the catalyst? One catalyst. Could be mean reversion and evaluations, which is another way of saying gravity. Another catalyst could be slowdown in the economy in which growth stocks mean revert towards value stocks in relative valuation. Another catalyst could be”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“A year for the next five years. That's a big win. I think that's a conservative forecast. Do I want to forecast that value will be growth in 2025? Sure, but not with high confidence. I'd give it 60-40 odds on a next year basis, 40% chance of being dead wrong, and I give it at least 80-20 odds in the coming 10 years.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“The short answer to your question is nobody knows where we are in that cycle. So I'm going to guess, and it is, I'll acknowledge only a guess. My guess is that we're very near the bottom of a value cycle. And value today, just returning to historic norms, where value is normally about a fourth to a fifth as expensive as growth, would require value to double relative to growth stocks. Double. 10,000 basis points of incremental performance. Spread that over 10 years, and you have 20 plus percent outperformance per year. Do I think we're going to see 20% outperformance per year over the next 10 years? No, I shave that a bit. But I do think value could easily beat growth by 5, 6, 7 percent a year for the next five years and therefore beat the market by 2 or 3 percent.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“So people were using past returns to say, oh, I can make it 9.5%. I have a balanced portfolio. My bonds are yielding six. My stocks are going to give me 12. So I can assume 9.5 for my 60-40 portfolio. And lo and behold, stocks with a dividend yield of one to earn that 12% return assumption would have had to see growth of 11% a year. and would have had to see no mean reversion in valuations. So of course the earnings can grow 11% a year. And of course there was mean reversion. So long-term history, even long-term history, can lead you astray. I've been stunned that in now a long career going back 47 years, I've been pounding the drum on re-evaluation for a long time, for decades, as something that misleads us. It's misleading us big time now. Because you have a tripling evaluation multiples in the last 15 years.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“From a dividend yield of eight at the start of 1950 to a dividend yield of 1.1 at the end of 1999, half a century, sevenfold change in the value attached to every dollar of dividends. Sevenfold change over the course of 50 years, that's 4% per annum. So that means that for a half century, your historical return had a biased picture of returns pensions use a pension return assumption in determining what the pension impact on earnings per share is. And that pension return assumption can be somewhat subjective. At the beginning of 2000, the average pension return assumption was 9.5%, the highest in history was never higher before, never higher after, and it was at a peak.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Well, that's pretty impressive. Now, the same dynamics play out in the coming year. The coming year, you've got yield. You know that. You've got growth with a lot more uncertainty, a lot more wiggle room. So, yeah, the growth could be five, but it could be 10 or it could be zero. So big uncertainty. And the revaluation component could be up 30% or down 30% relative to earnings. That's why the one-year forecasts are very difficult. There's also the interesting issue that using long-term history can lead you astray. My favorite example is the second half of the 20th century. Most of us died before our first 50 years of investing are wrapped up. And so 50 years is a long time. The stock market went”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Long horizon forecasts, the long-term return of anything you invest in consists of what's the yield, what's the growth in income in the years ahead, and what's the change in valuation multiples, or in the case of bonds, what's the change in the spreads. And if you know those three numbers, you can estimate future returns with remarkable precision. For instance, 10-year returns for 10-year bonds, your best forecast is the starting yield. You're going to be within 1% either way. For the stock market, it's not as formulaic, but the starting yield plus long-term historical growth plus some mean reversion towards the past gets you a forecast that shockingly over the last 50 years would have been within two or two and a half percent per annum of the actual stock market return most of the time.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“The 90s, followed by a stupendous decade? No. They were followed by a lost decade. Was the lost decade followed by another lost decade? No. It was followed by a stupendous decade. And so when you have a bull market that's taken us to valuation multiples that have only been seen once before in history, top of the dot-com bubble, you really ought to ratchet down your return expectations. I'm not saying be massively pessimistic and shun stocks forever. No, but do you really want to bet that this market's going to double when it could just as easily or perhaps more easily have a meaningful beer market? Personally, I'd like to have some margin of safety.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“From a fear perspective back in 2009, people were afraid of equities because they'd just fallen by half. Today, people are afraid of cash because cash has been a useless asset. And so from today's perspective, the fear premium ought to be negative.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“18 to 20. And we think there's a new normal that is to say markets are sustainably more expensive than they used to be 30, 40, 50 years ago. So we think the normal is about low 20s, 23, let's say. If it falls from 38 to 23, that's going to cost you about 6% a year. Ouch. So let's split the difference. Let's say maybe it doesn't mean revert or maybe it does. That takes away 3 and gets you to about 3.5. So that's the way we do our calculations of the risk premium. And on that basis, the equity or risk premium today is modestly negative. How can you have a negative risk premium? Another part of that paper speculated on the idea that it's not a risk premium, it's a fear premium. It was mislabeled all along, which misled the quant community and the academic community for the last 60 years. It's a fear premium.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Schiller PE ratio tripled dividend yields fell by two thirds. All right, well, that's a big change in what people will pay for every dollar of earnings or every dollar of dividends. People are willing to pay a lot. And so then the question is, where will that relative evaluation be, let's say 10 years from now? We have a website. People look up asset allocation interactive. It's a free website where we forecast returns for upwards of 200 different asset classes. And our forecast for U.S. stocks is about 3.5%. I just took you through arithmetic that said six and a quarter. What's the difference? Well, let's assume today's shiller PE ratio is fair, and 10 years from now it's still 38 times. Then you get your 6 1 ⁇ 4%. Give or take. It was growth will be a little different from the 5%, but not drastically. Let's suppose you get mean reversion, the historic norm is”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Now you aren't going to get any growth from an income from bonds or cash. They're called fixed income for a reason. So, all right, you've got one and a quarter yield. You've got 5% as a reasonable growth expectation. That gives you six and a quarter percent return. Compare that with, call it four and three quarters or four and a half for US cash. And you're looking at about a 1.5% risk premium for stocks. That's the risk premium. Now people can have subjective views. That's also a risk premium, but it's subjective and it's based on whims and speculations and often some pretty shabby thought. So there is an equity risk premium right now, but it's kind of skinny. So there's another component I mentioned earlier that the rebound invaluation multiple since 2009 was dependent.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Premium by looking at differences. You've got a yield of close to 5% for cash. You've got a yield of 1.5% for stocks, second lowest in history, only the dot-com bubble had a lower dividend yield. And we know what happened after that. All right, well, that's a big difference, but surely you're going to see wonderful growth in earnings and dividends. Well, the consensus according to Lipper is 18% long-term growth in earnings and dividends. Pardon me, we're at a peak in earnings and dividends as a percentage of GDP very near historical all-time highs. And you're expecting 18% growth? Are you expecting 18% GDP growth? I don't think so. If you're expecting 5% nominal, 2.5% real GDP growth, then 5% nominal growth in earnings or dividends ought to be a reasonable expectation.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Parts to the returns, and a big part of the return can be revaluation. In the spring of 2009, the US stock market hit bottom at 13 times the 10-year average earnings for the companies in the S&P or Russell index. That's called a Schiller PE ratio of 13. Today it's three times that, it's 38 times. So the stupendous run-up over the last 15 years is in large measure a consequence of rising valuation multiples of people being willing to pay more and more and more for every dollar of earnings. That's not risk premium. That's excess return. Risk premium is what your expected return is for stocks relative to bonds or cash. And if you want to be objective about it, you'd want to calculate today's”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Sure. And just in case your audience is curious, this was a paper that I wrote for the 50th anniversary edition of the Journal of Portfolio Management. The founding editor was a dear friend of mine, and a large chunk of the paper was focused on the equity risk premium. People look at past differences in returns, stock returns versus bond returns or stock returns versus cash returns. And they say that's the risk premium. No. That's the past historical excess return. That's a different beast entirely. The past historical excess return has a lot of constituent parts. Dividend yields versus bond or cash yields can be very different. The growth rate of earnings and dividends can be significant and the growth rate of coupons on bonds zero by definition. So very different constituent”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Fundamental index the cap weighted market is hardly passive. Cap weighted market is making constant changes in what it believes the future will look like and where it believes the opportunities will lie. And so the cap-weighted market from a fundamental perspective is a growth-tilted momentum chasing popularity weighted index, which is going to work when trends are chasing popular ideas. can hurt you badly if those trends turn out to be a bubble.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“And it'll struggle. So I like to think of fundamental index as an economy-weighted index. You weight companies on how big their business is. If the price rises and the fundamentals don't, you rebalance down. If the price tanks and the fundamentals stay solid, you rebalance up. So you're rebalancing against price moves that aren't supported by changes in the fundamentals. Now, the market is cap-weighted. So the cap-weighted index is studiously mirror the look and composition of the market. Fundamental index studiously mirrors the look and composition of the macroeconomy. Now, think of it this way. From the vantage point of cap-weighted indexers, this is not a passive strategy. This is an active value tilted strategy that contra trades against price moves. Fair enough. Viewed from the perspective of”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“On one measure and a small footprint on three others, pretty good sized company, certainly in the top 25, but not in the top three. And Chevron reliably in the top 10. So you wind up with weightings that reflect the macroeconomy. Now, the way I like to think about this is if you weight the portfolio, if you choose stocks based on how big they are, the companies, and weight them on how big they are, you have a fundamental index. Rafi stands for research affiliates fundamental index. The cap weighted market will take all the growth stocks with lofty expectations and say, these are great companies. I'm pricing them higher. So relative to the macroeconomy, the cap-weighted market is a growth-tilted momentum chasing popularity-weighted index, which works great when you have momentum, when you have”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Purpose of Rafi is to be an economy weighted index that weights companies according to their macroeconomic footprint. Now when we walk on the beach our footprint in the sand has multiple measures, length width, depth of the footprint. Same thing is true for companies. Chevron has fairly large footprint in terms of sales relative to all publicly traded companies. Fairly large on profits relative to all company profits. Very large on dividends relative to all company dividends and pretty large on book value. NVIDIA has a big economic footprint on profits but not on sales. And so if there's any mean reversion to their monumental 53% profit margin, watch out. Book value, they're small, dividends, well, they don't pay any. So you wind up with a company with good size economic footprint.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“In B of A, 2% position in city. Why? Because those companies were about 2% of the U.S. economy each. We had a 1% position in GM because it was 1% of the US economy. It went bust about eight weeks later. And so the stock went to zero. But if one stock goes to zero and two other stocks triple, you're doing fine. So the shocking thing was that RAFI lagged the market in 2008 when value was getting crushed. by 3% and then outperformed in 2009 by 15%. So you got it back with a vengeance. And we see that happening again and again. Anytime I see Rafi underperform, I start to get excited because I know what happens next. We pivot into a deeper value tilt and when value comes back we get it back with a vengeance.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Performance versus value is relentless. The relative performance against the broad market is more iffy when value's winning, boy, do we win handily, big time. When values losing, we have headwinds and we often will underperform. The aftermath of the global financial crisis, value staged a nice comeback in the middle two quarters of 2009, and then started to sputter. Value therefore roughly matched the stock market in the year 2009 underperforming big in the first quarter, then outperforming, then underperforming, finishing right about in line with the market. How did RAFI do? As value was tanking, we went to a deeper value tilt. And when value snapped back, we got it back with a vengeance. We had a 2% position.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“In 2021, reports of values death have been greatly exaggerated, in which I look at the attribution and found that the entire drawdown for value came not because value companies were struggling, not because the value investing was a bad idea, but because value-investing was falling out of favor and getting cheaper. When value is melting down to that extent, no, RAFI will not beat the broad market, but it beat value handily, and the result is from 2007 to today, Rafi has roughly kept pace with the broad market, similar return to the SP five hundred, similar return to the Russell one thousand, but anchoring on value stocks, which are now Dirk Chi. So to the extent anyone believes value deserves a place in their portfolio, why would you invest in value any other way than fundamental index?”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“You look back value peaked in 2007 and it hit bottom in the summer of 2020. It bottom bounced again at the end of 21. It's bottom bouncing again now. Back in 2007, growth stocks were three times as expensive as value. Some are at 2020 and it widened to nine times. That means value had gotten threefold cheaper in the space of those 13 years relative to growth stocks. That spread of nine to one was actually wider than at the top of the dot-com bubble. Now value underperformed if you look at Russell value versus the market underperformed by 38%. But if you're getting cheaper by two-thirds and you end up performing by 38%, it means that if the relative valuation had remained where it was, value would have outperformed. So in fact, the value effect is alive and well. I wrote a paper in the financial analyst journal.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT
“Percent a year. If you compare it with value indexes that are cap weighted, you get the same drag from the cap-weighted version, and so relative to value indexes, we find that the outperformance is relentless. In the U.S. in the last 17 years, RAFI would have beat the Russell Value Index 14 out of 17 times. The global index against MSCI acqui value outperforms in 15 out of 17 years. I mean, that's astonishing consistency. And it all comes about not because of the value tilt. The value tilt is a consequence of fundamental weighting. And yes, value does have a little bit of an alpha, but the big alpha comes from rebalancing, from contrading against the markets constantly changing opinions.”
2025-01-03 · We Study Billionaires · TIP688: Long-Term Market Cycles w/ Rob Arnott · IDENTIFIED FROM THE TRANSCRIPT