If you spend $100 to buy an asset that produces $4/profit per year, all else equal you should expect to make less money than if you had spent $100 to buy an asset that produces $6/profit per year. I think this is pretty straightforward, and (unsurprisingly) it’s consistent with the historical data. If you try to generalize from few enough datapoints with enough noise you can manage to lose the signal in the noise.
ie, why do you expect what you said not to be priced into current expectations?
What does that mean? Which asset price would you expect to be different if in fact smart investors expected equities to have low returns?
Are you willing to bet on <2% expected real returns?
How would you operationalize that bet? At the end of the year, I give you market returns on $1, and you give me $0.02 + inflation?
You’d be a fool to make such a bet, and (other than the risk that you’d default) I’d be a fool not to take it. It’s a pure arbitrage: I take the bet with you, then borrow $1 for a year at the going interest rate (which is about 0.3%+inflation), then buy $1 of equities, and I make 2% per year with zero risk.
The problem is that betting odds don’t reflect probabilities, they reflect the probabilities of possible worlds weighted by how much I value money in each world. To the extent that markets are efficient, everyone’s betting odds ought to imply a 0.3% real return for the market over the next year, because that’s the risk free interest rate.
You could instead bet something other than money, something that isn’t more valuable to me in worlds where I have less money. In that case I’d still be happy to sell market returns at 2%+inflation. (In fact I’m basically making that bet every day I decide not to be leveraged in the current market.)
What does the outside view say about that claim? https://www.bloomberg.com/view/articles/2017-10-10/cape-has-a-dismal-record-as-predictor-of-stock-performance
ie, why do you expect what you said not to be priced into current expectations?
Are you willing to bet on <2% expected real returns?
Which claim?
If you spend $100 to buy an asset that produces $4/profit per year, all else equal you should expect to make less money than if you had spent $100 to buy an asset that produces $6/profit per year. I think this is pretty straightforward, and (unsurprisingly) it’s consistent with the historical data. If you try to generalize from few enough datapoints with enough noise you can manage to lose the signal in the noise.
What does that mean? Which asset price would you expect to be different if in fact smart investors expected equities to have low returns?
How would you operationalize that bet? At the end of the year, I give you market returns on $1, and you give me $0.02 + inflation?
You’d be a fool to make such a bet, and (other than the risk that you’d default) I’d be a fool not to take it. It’s a pure arbitrage: I take the bet with you, then borrow $1 for a year at the going interest rate (which is about 0.3%+inflation), then buy $1 of equities, and I make 2% per year with zero risk.
The problem is that betting odds don’t reflect probabilities, they reflect the probabilities of possible worlds weighted by how much I value money in each world. To the extent that markets are efficient, everyone’s betting odds ought to imply a 0.3% real return for the market over the next year, because that’s the risk free interest rate.
You could instead bet something other than money, something that isn’t more valuable to me in worlds where I have less money. In that case I’d still be happy to sell market returns at 2%+inflation. (In fact I’m basically making that bet every day I decide not to be leveraged in the current market.)
>In fact I’m basically making that bet every day I decide not to be leveraged in the current market.
that’s what I was curious about.