Netflix Troubles May Have Ripple Effects, Research Affiliates CEO Says

Rob Arnott discusses the concept of market bubbles, using Netflix and Tesla as examples. He explains the definition of a bubble, emphasizing the use of implausible assumptions in valuation models and the indifference of marginal buyers to these valuations. Arnott warns about the risks of bubbles, noting their potential to persist longer than expected. He also highlights the impact of indexing on investor exposure to bubble stocks, pointing out that stocks added to indexes often underperform, while those removed tend to outperform.

How do capitalization weighted indexes affect investor awareness of bubble stocks?

What findings does Rob Arnott present regarding stocks added to indexes?

What is the significance of the performance difference between added and dropped stocks in indexes?