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Unexpected Returns: Understanding Secular Stock Market Cycles
Winner ForeWord Magazine Bronze Award for Best Business/Economics Book of the Year. This investment book uses extensive full-color graphics to explain the fundamentals of the markets-an essential resource before reading how-to books or engaging investment advice. It is a unique combination of investment art and investment science that enables the reader to differentiate between irrational hope and a rational view of current market conditions.
296 pages, Hardcover
First published April 1, 2005
29 people are currently reading
269 people want to read
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Displaying 1 - 13 of 13 reviews
April 7, 2021
Amazing book with unique research.
Never heard before about Ed Easterling or the Crestmont Research. After reading this book became fan of Ed and research what his company is doing.
This not an easy book. There is a lot of jargon and a very good understanding of micro and macro economy is required to understand the book. I have found here some research ideas and data presentation I wasn't aware of. All ideas are clearly laid out and explained why they work and how to apply them in your investing.
Again, this is not a book that will teach you how to invest. There are many other books which will help you with that. This book will show you how to use historical data to monitor your investment positions, when to enter your trade ideas and how to gauge the market sentiment using non-trivial indicators.
Highly advise to read the book.
Never heard before about Ed Easterling or the Crestmont Research. After reading this book became fan of Ed and research what his company is doing.
This not an easy book. There is a lot of jargon and a very good understanding of micro and macro economy is required to understand the book. I have found here some research ideas and data presentation I wasn't aware of. All ideas are clearly laid out and explained why they work and how to apply them in your investing.
Again, this is not a book that will teach you how to invest. There are many other books which will help you with that. This book will show you how to use historical data to monitor your investment positions, when to enter your trade ideas and how to gauge the market sentiment using non-trivial indicators.
Highly advise to read the book.
April 26, 2020
A good introduction for anyone that wants a better understanding of investing through cycles. Not many new concepts finance professionals, but the author does a good job explains the correlation between interest rates, inflation, and P/E to secular bull and bear markets.
July 16, 2020
The book that illustrated why using average return on stocks of 10% makes no sense and can be extremely risky at times when stocks are overvalued. It will introduce you to dynamic asset allocation methods that are useful to achieving higher risk-adjusted returns in combined bear and bull markets.
May 5, 2025
Identify the trend
Is buy and hold the best? Will dollar cost average work for you? Does the stock market move from undervalued to overvalued and back again? Read this book to find out.
Is buy and hold the best? Will dollar cost average work for you? Does the stock market move from undervalued to overvalued and back again? Read this book to find out.
Want to read
December 23, 2025For personal reference:
“best investment books ” according to Michael Kitces
“best investment books ” according to Michael Kitces
August 21, 2018
During the summer InvestingByTheBooks will review some older books that we never got around to writing about although we think they are important. Ed Easterling shows that by taking a step back and getting a better overview the investor gains an understanding of secular market cycles that most lack. The basic premise is that the valuation of markets matters and affects expected return during periods of both one and two decades ahead during which trends in PE-ratios give vastly different investment results.
Easterling who’s the founder of Texan investment firm Crestmont Holdings and a popular writer of investment research at crestmontresearch.com, with a number of very long term historic time series shows how the equity market moves secular trends of 15 or 20 years during which it moves from low PE-ratios to high or vice versa. It might be true that in the very long run – say 50 or 100 years – the equity market has an annual return of for example 8 percent, but during a decade or two the average return is often far higher or lower than this. Decades starting with low valuations have much higher average returns than those starting with high valuations. Contrary to financial theory it is not necessarily so that taking higher risk by for example holding a higher proportion of equity to bonds gives higher expected returns. It simply depends on the starting valuation of both assets. According to the author the correlation between starting PE-ratio and the subsequent 20-year average annual return is -69 percent. Taking a higher risk could for an investment with a horizon of a decade or two have lower expected return than taking lower risk. Unfortunately, most investment advice focuses either on the average 100-year horizon or on the next 6 to 12 months and this seldom reflects investors’ actual investment horizons.
Decades that start with high valuations are usually trending sideways despite large cyclical swings. Further, the author states that investors underestimate the long-term adverse compounding effects of sideways volatility and negative periods. Hence, Easterling argues that depending on which environment we are in at the moment we should act accordingly as investors. If valuations are low enough to give expectations of a secular bull market, then the investor should “sail along” with an equity buy-and-hold strategy. If a secular bear market is more likely then the investor should switch to “rowing” through various absolute return strategies, i.e. invest in hedge funds.
With enlightning color pictures and graphs it is shows that over very long time the movements of the equity market reflect the value of corporate cash flows. However, during decade-long periods there are huge deviations. The long-term trend in cash flows or earnings is actually remarkably stable. Instead, the secular trends in equity valuations depend on changing in PE-ratios. Easterling shows that these valuation trends do not depend on the average level of GDP-growth for a period. If something the correlation is the opposite from what is expected. The author finds a Y-shaped correlation between PE-ratios and inflation levels. When inflation is really high or there is severe deflation, PE-ratios are low and then there is a sweet spot when inflation is in low single digits when historic PE-ratios has been high.
In the middle part of the book Easterling launches what he calls Financial Physics – a way to predict future equity returns. The starting point is the trend in real GDP and then an estimate of inflation is added that both gives the nominal GDP and hence the EPS plus an estimate of the PE-ratio. Multiply the PE-ratio and the EPS to get the equity market returns. As future inflation is unknown and also as the correlation between inflation and PE- levels is low I would personally prefer to use some measure of reversal to the mean in PE-ratios.
Unexpected Returns makes it clear that the stock market has a faint but strikingly long memory that tilts probabilities in one way or the other thereby changing the returns landscape.
Easterling who’s the founder of Texan investment firm Crestmont Holdings and a popular writer of investment research at crestmontresearch.com, with a number of very long term historic time series shows how the equity market moves secular trends of 15 or 20 years during which it moves from low PE-ratios to high or vice versa. It might be true that in the very long run – say 50 or 100 years – the equity market has an annual return of for example 8 percent, but during a decade or two the average return is often far higher or lower than this. Decades starting with low valuations have much higher average returns than those starting with high valuations. Contrary to financial theory it is not necessarily so that taking higher risk by for example holding a higher proportion of equity to bonds gives higher expected returns. It simply depends on the starting valuation of both assets. According to the author the correlation between starting PE-ratio and the subsequent 20-year average annual return is -69 percent. Taking a higher risk could for an investment with a horizon of a decade or two have lower expected return than taking lower risk. Unfortunately, most investment advice focuses either on the average 100-year horizon or on the next 6 to 12 months and this seldom reflects investors’ actual investment horizons.
Decades that start with high valuations are usually trending sideways despite large cyclical swings. Further, the author states that investors underestimate the long-term adverse compounding effects of sideways volatility and negative periods. Hence, Easterling argues that depending on which environment we are in at the moment we should act accordingly as investors. If valuations are low enough to give expectations of a secular bull market, then the investor should “sail along” with an equity buy-and-hold strategy. If a secular bear market is more likely then the investor should switch to “rowing” through various absolute return strategies, i.e. invest in hedge funds.
With enlightning color pictures and graphs it is shows that over very long time the movements of the equity market reflect the value of corporate cash flows. However, during decade-long periods there are huge deviations. The long-term trend in cash flows or earnings is actually remarkably stable. Instead, the secular trends in equity valuations depend on changing in PE-ratios. Easterling shows that these valuation trends do not depend on the average level of GDP-growth for a period. If something the correlation is the opposite from what is expected. The author finds a Y-shaped correlation between PE-ratios and inflation levels. When inflation is really high or there is severe deflation, PE-ratios are low and then there is a sweet spot when inflation is in low single digits when historic PE-ratios has been high.
In the middle part of the book Easterling launches what he calls Financial Physics – a way to predict future equity returns. The starting point is the trend in real GDP and then an estimate of inflation is added that both gives the nominal GDP and hence the EPS plus an estimate of the PE-ratio. Multiply the PE-ratio and the EPS to get the equity market returns. As future inflation is unknown and also as the correlation between inflation and PE- levels is low I would personally prefer to use some measure of reversal to the mean in PE-ratios.
Unexpected Returns makes it clear that the stock market has a faint but strikingly long memory that tilts probabilities in one way or the other thereby changing the returns landscape.
March 6, 2017
Quite a technical read and one that will require focus for the non financially focused.
Easterling focses here on using analogies and lots of empirical evidence to give share market tips along with bonds information.
Worth a read and great to expand your interests and financial knowledge
Easterling focses here on using analogies and lots of empirical evidence to give share market tips along with bonds information.
Worth a read and great to expand your interests and financial knowledge
June 26, 2016
***1/8
Repetitive and quite elementary, with a dearth of actionable intelligence or even further reading on it; too enthralled with economic orthodoxy while at the same time attempting a critique of it, relying on flawed statistical methods and historical measurements cast in to the future. Three of the 3.125 stars come from the author's repeated analysis of and insistence on the superiority of absolute return strategies (options are mentioned early in the book - and then never elaborated on!) to indexing for the sophisticated investor: the problem is, the sophisticated investor knows this, the material is presented to a novice investor or client of a money manager, and while the sophisticated investor already knows how to reduce market risk, to hedge various factors, etc., he also knows most of the material in the book, where the novice investor, who can learn from the material, is unaware of such strategies and is not introduced to them here.
The book can be better reconstructed, with increased rigour and practical applicability, by instead reading Shiller's Irrational Exuberance on the inefficiency of markets, and some of Nicholas Taleb's books on the nigh-uselessness of CAPM and MPT in real markets (especially during corrections, when their benefits are most needed, they most fail to work: witness the 'ten-sigma' fall of LTCM), a smattering of behavioral finance and other works demolishing Fama's EMH, and an introductory book on hedging and options such as 'The Volatility Surface', 'Options as a Strategic Investment', 'Options and Derivatives' by Hull, or any of a dozen others.
Repetitive and quite elementary, with a dearth of actionable intelligence or even further reading on it; too enthralled with economic orthodoxy while at the same time attempting a critique of it, relying on flawed statistical methods and historical measurements cast in to the future. Three of the 3.125 stars come from the author's repeated analysis of and insistence on the superiority of absolute return strategies (options are mentioned early in the book - and then never elaborated on!) to indexing for the sophisticated investor: the problem is, the sophisticated investor knows this, the material is presented to a novice investor or client of a money manager, and while the sophisticated investor already knows how to reduce market risk, to hedge various factors, etc., he also knows most of the material in the book, where the novice investor, who can learn from the material, is unaware of such strategies and is not introduced to them here.
The book can be better reconstructed, with increased rigour and practical applicability, by instead reading Shiller's Irrational Exuberance on the inefficiency of markets, and some of Nicholas Taleb's books on the nigh-uselessness of CAPM and MPT in real markets (especially during corrections, when their benefits are most needed, they most fail to work: witness the 'ten-sigma' fall of LTCM), a smattering of behavioral finance and other works demolishing Fama's EMH, and an introductory book on hedging and options such as 'The Volatility Surface', 'Options as a Strategic Investment', 'Options and Derivatives' by Hull, or any of a dozen others.
June 2, 2016
A great book about Secular Stock Market Cycles, it presents some of the best statistics that you have never seen before. One of the key findings is that average return rarely occurs in stock market even taking a ten year horizon, for example, the S&P 500 was at 1400 in 2000 and now at 1100 after 11 years. This kind of lost decade has happened multiple times before in 20th century. Another argument is the change of P/E ratio instead of EPS growth dominates the price of the stock market. A Secular bull market starts from low P/E ratio and ends with high P/E ratio, vice versa for secular bear market. Y curve effect: high inflation and deflation will hurt P/E ratio and the maximum P/E ratio (20+) always occurs during stable price period, i.e. very low inflation period. You can actually find all the tables and graphics with quarterly update at the author's website Crestmont Research (www.crestmontresearch.com/). But the book is still a great source and give you a big picture of the stock market trend.
August 11, 2020
The first book that clearly illuminates the connection between high stock valuations and lower returns in the future. This book changed my entire perspective on asset allocation and a move from static to active asset allocation.
March 28, 2008
A great book on understanding secular market cycles and what it means for your investment portfolio.
April 25, 2010
A must read for anyone in the Financial Services industry.
January 30, 2019
Excellent
Top-notch book from a brilliant fella who understands key drivers in the market and ignores the noise! Most books are garbage - this is a gem.
Top-notch book from a brilliant fella who understands key drivers in the market and ignores the noise! Most books are garbage - this is a gem.
Displaying 1 - 13 of 13 reviews