The Bubble You Can't Short | Rob Arnott on What You Can Do Instead

In this episode of Excess Returns, Rob Arnott discusses market bubbles, drawing parallels to the dot-com era and highlighting the implausible growth assumptions often required to justify current prices. He emphasizes that bubbles are asset-specific and driven by narratives rather than discounted cash flow models, using Palantir as an example. Arnott advises caution against short-selling bubbles, noting they can persist longer than expected. He shares lessons from the dot-com bubble, including the importance of diversification into value stocks and non-U.S. markets, particularly emerging markets, which he sees as undervalued. Arnott also touches on the impact of AI, the dangers of excessive CapEx, and innovative index construction strategies like RAFI and RACWI, designed to enhance value and growth investing. He advocates for averaging out of expensive assets and into unloved ones, emphasizing the potential for international markets to exceed low expectations.