Rob Arnott is the founder and chairman of Research Affiliates, which as of September 2020 has $145 billion in assets under management managed worldwide. Arnott has developed his reputation for being a provocative practitioner by challenging conventional wisdom and previously and as chairman of First Quadrant LLP, Arnott helped build the firm into a renowned quantitative management powerhouse.
Research Affiliates’ brand of investing has evolved from several unconventional portfolio strategies that are now widely applied, including the fundamental index investment approach, since becoming the cornerstone of Arnott’s investment approach. Here, he considers some of the lessons he’s learnt throughout his extensive career.
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What is the top mistake investors make?
Predicting the future by extrapolating the past. Buying what looks smart, because it's gone up. It is the most common mistake. It is the most costly mistake.
Where do you go for investment or economic insights?
I read The Wall Street Journal and Financial Times, daily. You may be interested to know that I go straight to the op-ed page first. Then go back and look at the news. The op-ed page usually identifies things that are front and centre of investors’ attention today. Viewing it with a bit of scepticism and asking is this a 'nowcast' and does it create opportunities to do the opposite is very helpful. I love John Mauldin’s work, it's free. I love Jim Bianco's work, it's not free. I read quite a bit, I read academic journals, but usually just skimming, looking at the abstract and once every 10 papers, take a deeper dive.
“The op-ed page usually identifies things that are front and centre of investors’ attention today. Viewing it with a bit of scepticism and asking is this a 'nowcast' and does it create opportunities to do the opposite is very helpful”
What is the most memorable moment from your career to date?
That’s a tough one… the market crash of 1987. I had just moved from an asset management firm that I'd built — TSA Capital Management — to Salomon Brothers, where I was brought in as the global equity strategist. Fairly quickly discovered that I was expected to produce reports on equity strategy as long as they didn't disagree with Bob Salomon on equities, or Henry Kaufman on bonds. It was an interesting situation and watching the crash happen, the team at Salomon said: ‘You know all the people in the asset allocation community, call them and talk to them about making a trade.’ And so I did. I reached out to 15 or 20 different people — each running billions in asset allocation strategies — with the message: ‘The market is newly cheap. bond yields have come down sharply in a single day. This is a time to begin averaging in to much larger equity allocations.’ To my interest and surprise, every last one of the people I called said: “it's too tumultuous, we'll wait till things settle down.’ Well, by the time things settle down, the market will be much higher. That is indeed what transpired.
What’s your top tip for your younger self?
I was always very impatient. I was always deeply frustrated when I encountered bureaucratic impediments or scepticism, because this young guy was challenging conventional wisdom. I think [that over] the passage of time — I'm now 66, so I'm ostensibly beyond retirement age, although I can't imagine ever retiring — the thing that's changed most for me in the last 40 years is patience.
“...although I can't imagine ever retiring — the thing that's changed most for me in the last 40 years is patience”
What is an investor's best source of alpha? Where do the great Investors derive their outperformance?
You will not have superior performance if you're doing the same thing that everyone else, do something different. Now that for me, that means being contrarian, and buying what's deeply out of favour and unloved. For others, it could be doing deep-dive research to identify trends that are missing from the market. But there's an Ockham’s [sometimes spelled Occam’s] razor on that one, too. If you find something that you think is a company beautifully positioned for the future, and it's recently soared, ask the following question: how much of my insight isn't already reflected in the share price? Be sceptical, because 99% of the time what you hear is already in the price.
“Be sceptical, because 99% of the time what you hear is already in the price”
For more insights from Arnott, including more on why he thinks it’s so important to look for new ideas, listen to the full Opto Sessions episode, here:
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