Wall Street’s most brilliant minds often struggle to outperform the S&P 500, but Research Affiliates Chairman Rob Arnott may have cracked the code. He recently introduced an alternative index that challenges the conventional wisdom of stock market success.
In the eye-opening report titled “Nixed: The Upside of Getting Dumped,” co-authored with Forrest Henslee, Arnott reveals a fascinating trend. Stocks that are removed from indexes tend to outperform those that are added, a phenomenon likened to the personal growth that follows a breakup. This unexpected twist challenges the common belief that additions to indexes are surefire winners.
Here are some key takeaways from this groundbreaking research:
- Stock Performance Post-Index Changes: While stocks added to indexes often experience an initial surge in value, this momentum tends to fade quickly. In contrast, companies that are removed from indexes tend to fare surprisingly well in the long term, outperforming the broader market index by more than 5% annually for up to five years.
- Market Reactions and Trading Pressures: Deleted stocks face significant selling pressure after being removed from indexes, leading to depressed prices that may not reflect their true value. This creates an opportunity for a significant rebound in stock performance, fueling impressive gains for investors.
- Impact of Market Conditions: While dumped stocks may not have outperformed major indexes in the recent growth-driven market, the report suggests that this trend is cyclical. As market dynamics evolve, there is potential for a shift that could favor removed stocks over mainstream indexes.
To put these findings to the test, Research Affiliates introduced the Research Affiliates Deletions Index (NIXT). This innovative fund focuses on buying dumped stocks from top market-cap weighted indexes and holding them for a five-year period, offering investors the potential for substantial returns based on historical performance.
Arnott’s previous predictions, such as Tesla’s underperformance following its S&P 500 inclusion, underscore the value of considering the contrarian perspective. As the market landscape continues to evolve, investors may find opportunities for significant growth by paying attention to the overlooked potential of dumped stocks.
In conclusion, Arnott’s research challenges conventional investment strategies and offers a fresh perspective on market opportunities. By exploring the resilience and long-term growth potential of removed stocks, investors may discover untapped sources of value in an ever-changing market landscape. Embracing this contrarian approach could lead to substantial returns and a deeper understanding of market dynamics.
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