Author: Rob
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Predicting inflation to estimate future real returns
In the previous set of posts on equity allocation of investors, we looked at predicting long term market returns on a nominal basis. What we actually want to be able to do is predict real returns after inflation. This will be an important capability to determine the maximum safe withdrawal rate in retirement. The Trinity…
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Long term historical equity allocation of investors
In the last two posts we looked at an incredibly accurate set of models for predicting future 10 year annualized returns in the market. These models utilize the equity allocation of investors to predict future long-term returns. When investors allocate a high amount to equity, future long term returns will be diminished, while if they…
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Equity allocation of investors plus anchored value expectations – an even better model of future market returns
Continuing from the last post on my favorite valuation indicator for long term market returns, the equity allocation of investors, I wanted to follow up on this with an even better model for long term market returns. This post will get somewhat technical in data analysis, so be warned. If you look at the post…
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Equity allocation of investors – the best long term market valuation indicator
I wanted to discuss my favorite long term market valuation indicator, which we will call equity allocation of investors. What does that mean? Well, in short, of all the wealth and assets to which people can allocate their capital, it represents the fraction that is allocated to equities. The idea is simple – when investors…
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Avoiding False Precision When Investing
In the last post we talked about the importance of understanding what explicit and implicit assumptions we were making as we attempt to make important investment decisions. I want to focus on one particular erroneous assumption that I see all the time in investing – false precision. Good scientists are always trained to understand precision…
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Understanding the Assumptions You Make is a Key to Good Investing
Many years ago, when I was undergoing my engineering training in school, the professors in several classes would require that I write my assumptions before showing the solution on homework problems. Most of us found this to be quite annoying because we were certain that the assumptions were obvious, and it just took more time and…
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A Long Term Look at Return on Capital by Industry
We have been talking a lot about how durable and sustainable returns on capital lead to superior returns over long time horizons. I thought it might be instructive to look industry by industry and market sector by market sector to learn if there are any patterns to return on capital. If we know what to…
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The Pareto Principle can improve your life
In the last post, I mentioned the Pareto principle or the 80/20 rule. This rule states that for many systems or outcomes, 80% of the consequences or results come from 20% of the causes. I see this rule all the time in my scientific research. Complex systems with many variables often have 2 or 3…
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Is it better to save more or earn more?
In the quest to achieve your financial goals through investing, you will need to increase the capital base that you invest over time. So which is better, to save more of the existing money that you earn, or to earn more? Of course, the easy answer is both, but what if you had to choose? …
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Expand your investing ability through limit and discipline
Many people think that limits and discipline box you in and, well, limit you. Nothing could be further from the truth. By limiting the entire universe of investments and narrowing things down to just high and sustainable return on capital companies, you limit the universe of investment possibilities down to a much narrower list, true. …