Cliff Asness: evaluation

Transcript context

…OK. Versus history, on the measures I like. One of the most famous ones — we look at a bunch of different measures — is Bob Shiller’s cyclically adjusted PE. It’s price divided by long term rolling average of earnings for the S&P 500. You like low prices. You don’t like high prices. That number is more expensive in roughly 90 percent of 100 some odd plus years of history. That is a terrible forecaster for the next month or the next year. Do not do anything. That is not just a legal, it’s a human disclaimer. But over the next 10 years, nothing is perfect even over 10 years. But it’s statistically powerful. When things are expensive, you’ve made less money. When things are cheap, you’ve made more money. Bonds are the same idea. A measure for bonds that is very analogous to a PE for stocks is the yield on a government bond minus an economist’s forecast on inflation. People call that a real yield. It’s what you should care about. The nominal yield doesn’t really matter. It’s what you consume in. That is worse lower. This is a yield, not a price, so lower is bad. But that is worse than roughly 90 percent of history. The portfolio of half stocks and half bonds, if you take those two measures, scale them and combine them, is the worst ever. How is it the worst ever, when the two are 90th percentile? Well, I think you all have probably figured it out. They’re not usually 90th percentile bad at the same time. It’s a bit of a puzzle why they are, but they are. Having said that, Tyler, I’m still going to be a coward. We get to about the worst ever. We’ve hit this level before for portfolio. I used to think 100th percentile was pretty impressive in my career. Now, you never go past the 100th percentile. You’re a math guy. You know how it works. I’m a math guy.…

Stored transcript either side of the excerpt. The highlighted words are the published quote; the surrounding text is unedited source, never generated.