Morningstar - Q4 2021 - 76

Investors
sectors, because as technology costs come
down, the access increases across many sectors.
The reason auto analysts missed Tesla-
and they all did-is because they're not the right
analysts to be analyzing Tesla.
Amazon is a really good example of what did
come out of the tech and telecom bubble.
We think Amazon is the prototypical company
based on these innovation platforms. We're going
to see years of super growth from these
companies, because they are platform-oriented
companies, and the companies with the best
data and the best AI expertise are going to
take the lion's share of these opportunities. Tesla
is certainly in that category when it comes to
autonomous networks.
Reflecting on Amazon and the bust generally, that
period created such muscle memory in our
business that there is real fear when it comes to
our strategy. As we're going through due diligence
and client presentations, we get more questions
about the risks than we do about the opportunities.
I remember all too well in the tech and telecom
bubble, no one even thought about the risks.
So, we are not in a bubble today. That I know. But
I do believe that the market is beginning to
understand how profound some of these platform
opportunities are and how sustained and rapid the
growth rates are going to be.
If You Had to Choose
Needham: Given that you both love large-cap,
market-cap-weighted indexes, I'm going to give you
a choice. I'm going to give you $1 million. You can take
a 10-year Treasury bond that matures in 10 years
or you can take a U.S. large-cap index-based ETF.
You've got to hold for 10 years. Which would you take?
Arnott: I'd find that very difficult, because
I expect them both to produce about a 2% annual
return for the next 10 years. Can I put it in
emerging-markets value stocks?
Needham: You have to choose.
Arnott: Stocks, because there's more risk of upside
surprise than downside relative to our 2%
expectation. This is one area where risk is good.
The downside risk could take it 10% below
76
Morningstar Q4 2021
Disruptors get disrupted.
Rob Arnott
that. The upside could take it 15% above that.
That's an asymmetry I like.
Needham: We've got Rob going long the U.S. equity
market, for the first time in 15 years.
Arnott: No.
Needham: Cathie, over to you.
Wood: That's a hard one. I probably would choose
the equity, but I think the years ahead are
going to be so confusing because of this dynamic
of disruptive innovation and creative destruction,
which is not isolated to value stocks. There are
so-called growth stocks out there that are going to
be in harm's way, especially if the companies
have been buying back shares, leveraging up to do
so and to pay dividends, and haven't been
spending aggressively enough in the right areas in
R&D. We think that there's going to be a huge
deflationary pull out there, which means that
these companies are going to be in a bad way. To
service their debt, they'll have to sell their
increasingly obsolete products at lower prices.
Needham: So, it sounds like deflation equals
a Treasury bond?
Wood: I think the Treasury bond will do well,
and a lot of what people consider growth stocks
right now will be surprisingly poor-performing.
Arnott: The short answer is we both disliked the
question, because you didn't offer us anything
that we liked. Don't buy the index fund. Don't buy
the Treasury. Buy emerging-markets deep-value
stocks, which are likely to mean-revert well
enough to roughly double your money each five
years of this decade.
Needham: So, I lost control of the panel! Thanks very
much, Cathie and Rob. This was a lot of fun.
K
Daniel Needham, CFA, is president and chief investment
officer of Morningstar Investment Management.
Photography by Matthew Gilson.
https://www.morningstar.com/company/about-us/danieln
Morningstar - Q4 2021

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