
The Compound and Friends:
- Hosted by Downtown Josh Brown and Michael Batnick
- Rotating guests every Friday for expert insight on business and investing
Episode 109 with Rob Arnott at Future Proof:
- Live audience present during the episode
- Guest: Rob Arnott, founder and chairman of Research Affiliates
- Discussion topics: lessons from the tech bubble, smart beta, big tech valuations, Tesla and Nvidia, impact of AI on markets and economy
Rob Arnott Introduction:
- Native to Orange County
- Founder and chairman of Research Affiliates
- Core portfolio manager of PIMCO All Asset, All Authority, and PIMCO RAE funds
Smart Beta Strategies in Tech Bubble:
- Smart beta strategies attracted significant inflows due to investors' appetite for higher returns
- Performance chasing led to money pouring into multi-factor strategies without considering valuation
- Factors trading rich relative to historical norms were warned against in 2016 paper by Rob Arnott
- By 2020, most factors were extremely cheap relative to history
Cheap Factors vs. Rich Factors:
- Graph shows majority of factors trading cheap relative to history (80%)
- Quality factor always trades at a premium but can be small or large depending on valuation
- Value factor was off the charts cheap during this time period
Catalysts for Value Investing:
- Higher interest rates could diminish growth advantage of high-priced growth companies
- Inflation may break current return of growth bubble and favor value stocks
NVIDIA as an Example of Big Market Delusion:
- NVIDIA is a great company with visionary products but priced beyond perfection (42 times sales)
- Definition of bubble: implausible growth assumptions needed to justify current price; marginal buyer doesn't care about valuation models
- Other AI companies also have high multiples but not as extreme as NVIDIA's
Lessons from Past Tech Bubbles:
- Comparison between top 10 tech names of 1999 and their performance since then
- Not all companies at the forefront of breakthroughs perform well in the long run
AI's Impact on Markets:
- AI has potential to revolutionize various industries, including investing
- Neural networks and algorithms based on AI already used by quant funds and super jumbo hedge funds
- AI can create market-beating returns if it discovers new forms of fundamental investing
Potential Risks with Tech Stocks:
- Market cap-weighted indexes have become heavily concentrated in a few big tech stocks
- Biggest stocks getting bigger as a percentage of overall index weight
- Hubris is dangerous; enthusiasm, optimism, and lack of fear suggest a good time to rebalance into segments with fear
Role of AI in Investing:
- AI has the potential to outperform average financial advisors in managing money
- However, human element and client relationship are crucial aspects that AI may struggle to replicate
Meta (formerly Facebook) and Llama Release:
- Meta's release of Llama and widespread use of sophisticated AI raises questions about stock performance
- Companies like Meta could continue to thrive due to their ability to find new opportunities and leverage advanced technology