In March last year, Cliff Asness wrote a note called “The long run is lying to you”. In it, he defends value investing by emphasising that what drives return is not the current valuation but the change in valuation. And because value stocks are particularly cheap vs. growth stocks these days, any improvement in the relative valuation of value stocks vs. growth stocks leads to higher returns for value vs. growth. Now, the concept is nothing new under the sun. In the 1980s Jack Bogle already popularised a simple way to estimate future equity returns as dividend income + earnings growth + change in valuation. And every bond investor knows that the total return of a bond is approximately its interest income plus its duration times the change in yields.
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The long run is lying to you – or is it?
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In March last year, Cliff Asness wrote a note called “The long run is lying to you”. In it, he defends value investing by emphasising that what drives return is not the current valuation but the change in valuation. And because value stocks are particularly cheap vs. growth stocks these days, any improvement in the relative valuation of value stocks vs. growth stocks leads to higher returns for value vs. growth. Now, the concept is nothing new under the sun. In the 1980s Jack Bogle already popularised a simple way to estimate future equity returns as dividend income + earnings growth + change in valuation. And every bond investor knows that the total return of a bond is approximately its interest income plus its duration times the change in yields.