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Barry Ritholtz

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 sector — not just Tesla Inc. This is a “big market delusion.” The phrase was coined by Brad Cornell, a professor at UCLA and 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.