Rob Arnott: Dissecting Smart Beta, Investing in Disruption, and Momentum (EP.157)

Today we welcome Rob Arnott to the show! Rob is the founder of Research Affiliates and is a prolific writer who has published hundreds of articles for many different journals. We know firsthand, the power of Rob's work, and how it can alter the way you think about investing, and this depth of knowledge, coupled with his ability to make complex topics understandable makes him a dream guest for us! Rob is the co-author of The Fundamental Index, and we get some insight into this subject along with many other groundbreaking areas he has worked on. We cannot stress enough the rarity of Rob's gift for getting difficult ideas across in a deliberate and approachable way, and this is apparent through this illuminating conversation. For us, it was quite surreal to speak to someone so influential, and listeners can expect to come away with a greater understanding of 'smart-beta', intangible assets, forecasting, and some insight into the interesting areas of earnings dilution and 'the big market delusion', before Rob shares some very surprising information on factor momentum at the end of our chat. So for this and a whole lot more, in a truly stand-out episode, be sure to listen in! Key Points From This Episode: Rob's perspective on the drawbacks of cap-weighted indexing. [0:02:47.2] Getting to grips with 'smart-beta' and its links to RAFI. [0:06:21.6] Building a fundamental index and what the weights are based on. [0:11:17.4] Misconceptions of the value of backtesting when making investment decisions. [0:13:43.3] The prevalence of extreme factor-drawdowns for investments. [0:17:22.7] Weighing the importance of intangible assets and what to trust in this regard. [0:23:32.8] Value stocks in the current drawdown; value's relative cheapening over recent years. [0:25:53.8] Stories about the inner workings of a company and how this can vary in importance. [0:28:41.5] Unpacking 'the big market delusion' and the paper that Rob co-authored on the subject. [0:33:33.2] Rob's work on earnings dilution and how it relates to bubble-formation. [0:37:00.9] How the findings on earnings dilution impact strategies towards disruptive industries. [0:40:19.9] Forecasting the expected returns of a factor portfolio and utilizing Research Affiliates website! [0:44:03.0] The possibility of adding value through timing exposure to factors. [0:47:26.7] The truth about momentum in historical back-tests in the last few decades. [0:49:12.8] Rob explains the real costs of trading! [0:55:42.7] Momentum's primary existence in factors, ahead of individual stocks and sectors. [0:58:44.8] How Rob currently defines success in his life. [1:07:38.7]