Word: arnotte
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...Federal Reserve has pressed the cost of the capital for the banks down to zero, and they still can't earn a large profit," says top Wall Street strategist Robert Arnott of Research Affiliates. "That's a problem...
This wasn't because stocks were a horrible investment during that time--$1 put into stocks in March 1969, with dividends reinvested over the years, was worth $280 after 40 years. But bonds did even better ($1 to $294). Siegel, who has debated Arnott on CNBC and elsewhere, sees this as evidence that bonds are now too expensive rather than an argument against stocks--and Arnott doesn't entirely disagree. "I'd hate to have people read that and construe that bonds will win over the next 40 years," he says...
...Arnott argues that the evidence does indicate that "the common interpretation that stocks should be the core of your portfolio always" is wrong. "The main message I would want to convey to John and Mary Doe investor is, Pay attention to the price you pay for an asset," he says...
...that price matters has been getting more prominence in Siegel's work too. He says the one significant change in his advice over the past decade has been an increased emphasis on "value" stocks with prices that are low relative to earnings, book value and other fundamental measures. Both Arnott and Siegel are boosters of a new investment approach called fundamental indexing, in which one assembles a portfolio weighted by earnings, dividends or the like in order to avoid the tendency inherent in conventional capitalization-weighted index funds to load up on the most expensive stocks...
...main difference between the two experts really comes down to how confident each is that it's possible to pick winners. Arnott makes a living trying to do just that--his firm Research Affiliates manages the PIMCO All Asset Fund, which switches money between asset classes as conditions and prices change. For the past few months, his favorites have been high-yield (junk) and investment-grade corporate bonds and convertible bonds. Siegel favors simplicity--and stocks. "My feeling is that stocks over the next 10 to 20 years are going to give above-average returns," he says...