Dr. Alan O'Sullivan

And every year that historical average return looked higher.

And there was another school of thought that was saying, Arnott and actually Bogle and Schiller and so on, who were telling that, hey, those higher returns are coming from richer valuations.

And therefore, we should be a little worried here.

and we should actually expect lower returns.

And so there was real tug-of-war around 2000, and clearly exposed the noughties were won by the forward-looking crowd.

And therefore, I think we had this big shift from people looking at constant historical average returns, or assuming constant, versus thinking of time-varying expected return and taking the lead somehow from market yields and valuations.

And then, so that was...

Those are the two big ones.

And to both cases, I add this little extra saying that to the historical returns, even if you were to use historical returns, which people are still often doing that, we should adjust for any persistent richening or cheapening.

Like Cliff Fassness, my boss has written some nice papers where he's highlighted how important this can be.

And actually, I think I show in this series that even if you look at last hundred years,

There's 1% extra return coming from the fact that that roughly Shiller-Cape ratio went from 10 to 40 or something like that.

And so at least that 1% of richening should be taken away from forward-looking estimates.

if you think that we are not going to go to ever higher valuations in the future.

So that I think is, that was the adjustment to the historical side.

Whereas to the forward looking side, the question is sort of whether you are just thinking about, let's say equity returns as yield plus growth, or whether you add their mean reverting valuations as some market participants like to do.

And I certainly have played around with it, like it sort of makes

Makes sense to do that from long-run data.

There has been some mean reversion tendencies, but in the last 40 years, we have had such big structural changes.

Basically, for example, equities became systematically richer that anybody who was predicting mean reversion was basically disappointed.