07th Apr 2021 by Tor Flonaes

Breaking Down Past Performance

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Hot on the heels of my “soft” blog about the importance of financial planning I thought I would post an investment related blog by Clifford Asness (Co- Founder of AQR Capital Management) ‘Cliff’s Perspective – The Long Run Is Lying to You – March 2021’ which dissects past return drivers into earnings growth (fundamental) and multiple expansion/contraction (sentiment).


I loved this article and think it is an important read for any investor wanting a better understanding of what makes stock prices move (it’s far from just how the company is actually doing!) and to what extent past performance can guide expected future returns. Furthermore, I agree with the author that it is an underappreciated point.

I will keep this brief and just encourage you to read the full piece linked above as Cliff is a far better writer than me, but in essence:

  • Japan’s equity market outperformance, relative to the rest of the world in the 80s, was nearly entirely down to people paying more for the stocks, not Japanese companies growing faster.
  • The same is to a large extent true for USA’s equity market which outperformance over Developed Markets over the last 30 years: 75% of the outperformance appears to be down to multiple expansion.
  • If you know Cliff, you also knew this would end in a value argument!
    • Over the last 30 years (1990-2020) and, perhaps more eye-opening, the last three years (2018-2020) Cliff argues value has outperformed growth net of valuation changes. In other words: Growth outperformance was 100%+ down to growth stocks getting more expensive.

The key point is that for those expecting the outperformance of growth over value to continue or US over EAFE (Europe, Australasia and the Far East), one has to believe that growth companies and US companies will continue to become ever more expensive relative to their counterparts into the future.

I hope you enjoy the read and if you find the formulas a little technical, just read the text, the points are made clear in layman’s language in between the technical bits.

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