The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

The Warrior Philosopher

Rob Arnott is a disrupter of Wall Street’s sacred status quo. He is at the forefront of thinking about more effectively investing huge sums of money. He sits at the nexus where all of the old ideas about portfolio management ends, and new ideas begin. He is a confidant to Nobel Prize winners and a wise man to many of the world’s top investors. His ideas are changing the way stock and bond portfolios and indexes are managed. To anyone off Wall Street, this may seem insignificant. In the financial world, portfolio management is the essence of the market.

Arnott invented an idea called fundamental indexing. The name is bland, but it upends the old order of the money management industry, and offers insights into how individual investors can make money and manage risk.

First a little background: The stock market is organized into different sectors. Professional investors measure their investment returns against various sectors of the stock market, and the Standard & Poor’s 500 Index. The Standard & Poor’s 500 Index is essentially based on the 500 largest stocks that trade in the United States. This is an example of a capitalization-weighted index, which means membership is based on the capitalization (the total value of a company’s outstanding stock). Arnott, and his colleagues at Research Affiliates, believe that the old way is flawed. He believes—as do many of the market’s most sophisticated investors—that stock prices can increase too far, too fast, and that ...