Cliff Asness: evaluation

Transcript context

…Sure. Because we spent a lot of time — still a subject of measure — but my measure for using the word bubble, remember I’m a Gene Fama student. He hates the word bubble, too. Bubble is an inefficient market phenomenon. I will use it, but I hope I have a higher standard than many. Many in our field, have I think, dumbed the word bubble down to mean something we think is kind of expensive. That’s not a bubble. A bubble to me is something still subjective, because your answer may not be the same as mine, but is something I’ve tried my best to come up with future assumptions of growth, be it for a stock, inflation if it’s a bond, and current price, and I can’t come up with assumptions that would lead any rational investor, subjective again, to want to own this. When we did that for stocks, anywhere late ’99 to 2000, we assumed very aggressive future returns. We took Wall Street’s long-term forecasts, which were nuts, they had never been achieved before, current prices, and we came up with, if that happens, we make less than bonds. We were willing to use the word bubble now. Right now, this 100th percentile, US stocks and bonds. So you invest half your money in stocks, half your money in bonds. Historically, you’ve made about five percent over inflation. We think it’s priced now, at this level, to make about 2.5 percent over inflation. Rather than five?…

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