High starting valuations signal a lost decade
The guest argued that starting valuations are the primary determinant of long-term returns, and current high Shiller PE levels suggest historically low nominal returns over the next ten years.
The argument
The guest pointed to historical data showing that buying when the Shiller PE is around 40 typically yields subsequent ten-year compounded nominal returns of only -3% to +3%, whereas buying at 10 times yields around 15%. He emphasized the need to differentiate short-term momentum trading from long-term investing where entry price dictates outcomes.
The thesis, stress-tested
✓ What validates it
- ✓S&P 500 ten-year rolling returns trend toward the -3% to +3% range
- ✓Shiller PE ratio remains structurally elevated above 40 without earnings growth catching up
▸ Risks discussed
- ▸Short-term momentum, algorithmic trading, and passive flows can keep valuations elevated longer than historically expected
Hear it yourself
"And so we wrote the notes about how investors potentially face a lost decade because there's a very nice sloping line down fifty years of data, and you can actually do the chart over a hundred years as well, and you get the same kind of picture, that if you start from a valuation of around about 40 on the Shiller PE, historically, your…"
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