Masters in Business · Wednesday, September 2, 2026
Rob Arnott, founder of Research Affiliates, argues that traditional market cap-weighted indexes like the S&P 500, which have dominated investor inflows since the financial crisis, are becoming increasingly risky due to market concentration in a few large stocks. He criticizes the strategy of buying companies after they have already significantly increased in value and trading at high multiples, only to sell them at a loss when their market cap falls.
“Big, broad market cap weighted indexes like the S & P 500 have dominated investor inflows and performance really since the financial crisis. But lately, critics of cap weighting point out that increased market concentration of just a handful of stocks, aka the Magnificent Seven, is increasing risks for investors.”
“Suppose I came to you and said, I have a brilliant strategy. You're going to love it. This strategy involves watching companies and waiting until their market value gets above a certain threshold and buying them. On average, I'm buying them when they're up 75% relative to the market in the last year and trading it twice the market multiple. Some of these go on to achieve great success. Some don't. And our sell discipline is very simple. When the market cap falls below a certain threshold, we're going to sell them. And we'll sell them at, on average, half the market multiple at a loss of about 7,000 basis points relative to the market. What do you think?”
“What I've just described is the active side of indexing.”