Investing Amid Low Expected Returns
Some words of wisdom from AQR founder, Cliff Asness.
I don’t believe in “expectations”. Are they talking about 6-12 months? I’m buying great companies dirt cheap and am going to clean up over the next 6-24 months. I expect ridiculous returns, not sure what they’re referring to. I’ve never seen a market without irrational investors providing me opportunities. 🤣
@wall_street_deebo This speaks to expected returns within the framework of finance theory -- what returns have we seen in the market and what can we expect as a result of it (over the long run, you're supposed to have a basket of returns from which you can pull; if today, you take out a lot, tomorrow you'll have less left in that basket; so naturally the expectation for what is to be had goes down) ... this is also more commonly known as Equity Risk Premium -- how much % above the risk free rate is your financial instrument expected to make.
Definitionally, this is a very hard topic and academics have tried to wrap their head around it for decades (most widely known are Eugene Fama and Kenneth French.) There are competing theories to that, of course, but I tend to believe that the extrapolation that exists in markets is something worth thinking about -- i.e. How good does a business need to be in order to meet the expectations markets priced in.
You can get an excerpt of the book here: