And that's the good news.

Bubble Logic

Last year, Robert Levitt, a friend and professional colleague, provided me with a copy of Bubble Logic, Or How to Learn to Stop Worrying and Love the Bull by Clifford Asness. Although during the last year I'd read numerous articles discussing equity risk premium and the future of stock returns, I'd paid (in hindsight) inadequate attention to the implications of the articles. "Bubble Logic" blew away my indifference. Asness concluded his book with:

"Put simply, there are really three possibilities for the broad market.

1) Investors understand and are now more comfortable with a very low expected return on the stock market going forward.

2) We are in for an exceptionally long period of exceptionally high growth in real earnings that justifies today's market prices.

3) Most investors are not really thinking about either 1) or 2), but are engaged in wishful thinking..."

Asness' powerful, persuasive and often humorous writing convinced me that I fell into No. 3. That started me questioning my most closely held and revered investment assumptions.

It was sobering to realize that I, an "expert," might fit all too neatly into the camp of deluded wishful thinkers. Still, before jettisoning my current assumption set, I recognized that it was prudent to look further than one person's opinion. So, I collected the opinions of others from the journals and professional press and badgered professional money managers I respected for their thoughts. Although the basis for their conclusions varied widely, they were uniformly consistent. The last decade of wonderful equity markets is an anomaly. The expectation for future equity market returns equaling the historic "average" is, at best, grossly optimistic.

Possible Futures

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