If you’ve ever scratched your head wondering why your return expectations don’t quite match reality—or even expert forecasts—you’re not alone. Cliff Asness, co-founder of AQR, just spotlighted a new series by his colleague Antti Ilmanen called Understanding Return Expectations, and it’s full of lessons investors can’t afford to ignore.
The first big takeaway? Most people, especially retail investors, are just plain bad at forecasting returns. Asness puts it plainly: “A little secret (or at least something not stressed enough) is that expected returns found in academic research… can differ starkly from what surveys reveal about investors’ subjective return expectations.”
He explains that this gap is especially wide “at extreme valuations — for example in 2000 or 2021 (or even in 2024), where high valuations imply low expected returns in actuality… [but] are often the same times surveys report high subjective expected returns.”
Why the disconnect? One reason, Asness says, is that “academics and practitioners come at the problem from opposite directions.” Academics focus on the denominator—what return is required given today’s prices—while many investors and analysts “focus on the numerator, and thus associate high expected cash flows with high expected returns, regardless of price paid.” In other words, investors confuse strong past performance or earnings with a guarantee of future success.
This backward-looking mentality is what Ilmanen calls the “rearview mirror mindset.” According to Asness, Antti argues it’s “more pronounced if over-extrapolators recently got it right and became more confident… more typical for stocks than bonds… [and] more dangerous when the macro backdrop changes.”
What makes this series important right now? Asness doesn’t mince words: “There’s quite a bit of nuttiness in markets… whether looking at the relative pricing of stocks, or at a more macro level in US versus non-US equity markets.” He praises Ilmanen’s work as “comprehensive,” especially in how it separates rational from irrational investor expectations and tracks how they evolve over time.
Interestingly, institutional investors and bond buyers tend to be more level-headed. Asness notes that they “appear more rational and less extrapolative than individual investors and equity investors.” Equity analysts, on the other hand, are often “perennially overoptimistic.”
So what’s the punchline? “It pays to bet against unrealistic growth optimism at the market level or with single stocks,” Asness concludes. This is exactly why contrarian strategies work better in the long run than just blindly assuming the past will repeat.
In short: if you want better returns, stop using the rearview mirror—and start using some real perspective.
You can read the entire article here:
Cliff Asness – Antti Is (Still) Trying to Understand Return Expectations
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