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Electric Vehicles and the ‘Big Market Delusion’

Research Affiliates’ Rob Arnott says EV company stocks are priced as if all will gain a dominant share of the market.

How can an entire sector of the market consist of companies that are priced as if they will soon dominate their industry? That describes the electric vehicle, or EV, sector – not just Tesla Inc. This is a “big market delusion.” The phrase was coined by Brad Cornell, a professor at UCLA and at the California Institute of Technology, and referenced in a recent research piece by Rob Arnott, the founder and chairman of Research Affiliates LLC and this week’s guest on the Masters in Business podcast.  

Arnott points out that shares of companies in the EV space have risen in unison. While some will win and some will lose, they all can’t be better than average. When all of the companies in a single sector are priced as if each will be the winner and gain overwhelming market share, we end up with the situation described as a delusion. But not all EV manufacturers can have a dominant market share, suggesting the entire sector is wildly overvalued.

Research Affiliates, which manages $157 billion, created and patented a methodology for basing indexes on fundamental metrics instead of market capitalization weightings. The firm believes rebalancing portfolios on a fundamental basis relative to stock price creates additional performance at no additional risk relative versus rebalancing via market capitalization indexes.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business podcast next week with John “Jack” Brennan, the former chairman and chief executive officer of Vanguard Group. When Vanguard founder and investment legend John Bogle decided to step down as CEO, Brennan was his hand-picked successor, and ran the firm from 1996-2008.

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