The Rational Reminder Podcast John Cochrane: Modern Modern Portfolio Theory (EP.169)
Sep 30, 2021
01:23:02
Valuation Ratios Predict Long‑Horizon Returns
- High market prices relative to earnings mainly forecast lower future returns rather than guaranteed higher cash flows.
- This predictability appears at business-cycle and multi-year horizons, not as short-term actionable signals.
Returns And Cash Flows Are Linked By Accounting
- If prices are high relative to dividends one of two things must happen: dividends rise or future returns fall.
- Predictability of returns and predictability of cash flows are two sides of the same coin and cannot both be absent.
Predictable Returns Aren't Proof Of Inefficiency
- Return predictability does not automatically imply market inefficiency; it can reflect time‑varying risk premia.
- Predictability that aligns with business cycles can be consistent with efficient markets.
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Introduction
00:00 • 3min
Do Long Term Stock Returns Go Up?
02:32 • 3min
What Does Return Predictability Tell Us About Cash Flow Prediction?
05:04 • 2min
Is Return Predictability Imperative of Markets?
06:50 • 3min
Return Predictability Does Not Prove Markets Are Inefficient
09:51 • 2min
Is There a Reason Why You Shouldn't Be Buying?
12:11 • 3min
The Greatest Economic Growth Ever
15:36 • 2min
The Equity Premium Puzzle
17:25 • 2min
What Are the Long Run Risks?
19:09 • 2min
Classic Portfolio Theory - How Much Does It Change Predictability?
21:12 • 2min
Portfolio Theory - Predictability
22:54 • 2min
How to Time Variable Discount Rates Change the Way That Investors Think About the Marked Market Variations in Their Portfolio Value
24:27 • 2min
Mark to Market Accounting
26:46 • 2min
How to Explain Investments Better to People?
28:19 • 2min
The Riskless Asset for the Long Term Investor
29:59 • 2min
How Do You Manage Risk in This Pay Off Focus Portfolio?
32:26 • 2min
What's Your Investment Objective?
34:44 • 2min
Bonds and Performance Valuation
36:18 • 2min
Do Dividend Paying Stocks Really Pay Out?
38:41 • 3min
How Much Is Changed in Consumption Inequality?
41:46 • 2min
The Average Investor Holds the Market Portfolio
43:44 • 2min
Why Shouldn't Everyone Hold the Market Portfolio?
45:34 • 2min
Investing in the Financial Markets
47:28 • 2min
Taking Risk
49:05 • 2min
Don't Pay Too Many Taxes and Risk Management
50:49 • 2min
Investing in Factor Risks
52:32 • 2min
Risk Analysis Is Where You Start With Your Investments
54:10 • 2min
The Factor Risks in the Stock Market
56:01 • 2min
The Value Premun
57:32 • 2min
Is There a Risk in Holding Value Stocks?
59:56 • 2min
High Tech Portfolio Advice That's Worth the Price
01:02:11 • 1min
Portfolio Management
01:03:41 • 3min
The Price of a Stock Is a Fiduciary Theory
01:06:30 • 2min
Is Inflation Coming From Government Debt?
01:08:43 • 2min
Do Break Even Raids Tell Us Anything Like Their Pretty Low Rate?
01:10:15 • 2min
Cryptocurrency
01:12:07 • 2min
The Future of Cryptocurrency
01:13:54 • 2min
Cryptocurrency vs Central Ledger
01:15:48 • 2min
Is Bitcoin the Answer to the Sovereign Debt Crisis?
01:17:40 • 2min
Traditional Banking Is Awkward
01:19:38 • 2min
What's Your Father in Law?
01:21:11 • 2min
Today's conversation is an extremely enlightened and highly detailed one, that you may want to return to, in order to accrue all of its value. We host John Cochrane, an economist specializing in financial economics and macroeconomics. John has a popular blog and podcast called The Grumpy Economist and also hosts the GoodFellows Podcast. He is a Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution and a senior fellow at Stanford Institute for Economic Policy Research, and was a Professor at the Booth School of Business at the University of Chicago. In this fascinating chat, John shares so much of his expertise, going in-depth on the subjects that we and our audience are constantly exploring and excited about. We discuss long-horizon stocks, market inefficiency and return predictability, classic portfolio theory, risk-less assets, and performance evaluation. John also shares his perspectives on the future of centralized finances, digital and cryptocurrencies, and where the business of financial advice is headed. So for all this and more from a leader in his field, be sure to join us for this great episode of the Rational Reminder.
Key Points From This Episode:
- Breaking down the basics of why stock prices go up and looking at the market as a whole. [0:02:05.8]
- The information contained in valuation ratios about long-horizon stock returns. [0:04:25.3]
- Market inefficiency and return predictability; unpacking the opinions on the correlation. [0:07:17.8]
- What the research on available information and market timing tells us about predictability. [0:12:59.6]
- Under-appreciating risk and asking important questions about dividend growth in the future. [0:18:46.5]
- The huge impact that predictability can have on classic portfolio theory. [0:22:36.2]
- Volatility aversion and communicating important concepts across divides. [0:28:11.7]
- John explains the risk-less asset for the long-term investor. [0:30:12.6]
- Using the example of bonds to get to grips with performance evaluation. [0:36:26.8]
- Unpacking the roots of wealth inequality and the best perspectives for understanding it. [0:40:30.4]
- Misguided thoughts about the market and the usefulness of keeping general equilibrium in mind. [0:44:14.1]
- Market portfolios and the zero-sum game; hedging state variable risk. [0:52:40.5]
- Decisions about the ability to bear the value risk premium and allocation. [0:58:10.7]
- John's thoughts on the future of financial advice. [1:01:27.8]
- Describing the fiscal theory of the price level and its predictions about inflation. [1:06:03.6]
- Cryptocurrencies and value maintenance; John's perspective. [1:13:12.8]
- Assessing the longevity of traditional or centralized finance. [1:19:15.4]
- John's own definition of success in the different areas of his life. [01:22:06.1]