Aswath Damodaran: beware the past performance of US stocks

Past performance is no guide to the future, says Aswath Damodaran. But many of our investment strategies are shaped by the history of the US stockmarket over the past century or so.


2015 Hindustan Times

Aswath Damodaran,professor of finance, Stern School of Business, New York University

Past performance is no guide to the future, as we're always told in the small print on financial products. Yet it's what we've used to shape our long-run forecasts for returns from various asset classes. New York University professor Aswath Damodaran is not sure that this is a good idea.

Advertisement - Article continues below

For example, he tells Victor Haghani of robo-adviser Elm Partners, Past performance is no guide to the future, but many of our investment strategies are shaped by the history of the US stockmarket over the past century or so. Yet the trouble with using the US experience as the basis for saying that you should always own stocks for the long run, for example, is that "you've got a survivor market... the most successful market of the 20th century."

These strategies rely on "mean reversion" the idea that while variables such as share price valuations or corporate profit margins may deviate widely, they will always return to a long-term average. And yet we know that sometimes things do go badly wrong or change radically, and that as a result, sometimes markets never revert. But you won't find "evidence of catastrophe" in the US data "you're going to have to go look at the Austrian market to find it".

So we extrapolate from what was, in fact, an unusual market in an unusual period "the most mean-reverting, stable market of all time." The risk now, he says, is that this might change. "For me, 2008 was the dividing line where I think there was a structural break in the global markets. I am less and less trusting of mean reversion on a daily basis."


Most Popular

Investment strategy

How John Maynard Keynes learned the folly of market timing

In an extract from his book The Sceptical Investor, John Stepek explains how the great economist John Maynard Keynes came a cropper when he first star…
25 May 2020
Emerging markets

A new lease of life for the Brics

Emerging markets are having a surprisingly good crisis. Their long-predicted rise will now continue.
24 May 2020

Battling volatility: The benefits of an active manager

SPONSORED CONTENT – Alastair Wilson, managing director of Close Brothers, on the advantages of active investing in times of crisis.
21 May 2020