The Wisdom of Rob Arnott

There are certain fundamental truths about market survival that people tend to ignore or forget, just when they need it the most. Let’s look at some recent examples.
First, it has been reported that Bill Miller averaged down big time last month and now has an Enron-sized bet on Freddie Mac. While Miller has vigorously — even defiantly — defended is actions in his Q2 Commentary [DOWNLOAD PDF], the fact is that he has fallen into the classic trap for which Daniel Kahneman was awarded the 2002 Nobel Prize in Economics: prospect theory. May his faith in … regression toward the mean work out but what happens if Clayton is right and the financial sector remains “under-valued” longer than the Legg Mason Value Trust can stay solvent?
Second, there are limits to assumptions and backtesting. Rob Arnott made a big splash with fundamental indexation a few years ago. His analysis covered a period of 43 years, one that saw a huge expansion in financial services and leveraging. He can call the collapse of financial stocks the anti-bubble or whatever, but will his assumptions based on the past hold up into the future? Is his index fundamentally flawed?


I didn’t have time to grab the total return numbers from Bloomberg, but a look at his PowerShares FTSE RAFI US 1000 Portfolio ETF (in green) compared against suggested benchmarks of the S&P 500 ETF (cyan) and the Russell 1000 ETF (orange) tells you that something is not right.
Last, but not least, is the old saw that states if something is too good to be true, then it probably is. Yet, for some reason, even intelligent people can suspend reality for nearly an infinite amount of time when it comes to financial stuff. CFTC Commissioner Michael V. Dunn, chair the Foreign Currency Trading (Forex) Fraud Task Force said, “I would like to note that the Commission’s enforcement efforts can only accomplish so much. The first line of defense for potential customers/victims to avoid this type of fraud is education and common sense. This task force represents a major step toward developing and ensuring the effectiveness of this defense.”

The Stock Scan

The stock scan conducted after the close on Tuesday found 25 winners and 40 losers. The list of winners was ranked and sorted relative to performance against the S&P 500 and the NASDAQ 100 indexes. Click on the column headers below to sort other columns.
The scan is designed to find stocks that are current “in play”; criteria includes price movement, range and liquidity (500,000 shares on the day, 20-day average volume of 1.5 million shares). Please refer to the podcast for background information.