Part 4/8:
The relevance of historical performance in shaping future expectations cannot be overstated. The work of researchers Eugene Fama and Ken French reflects this sentiment, recognizing that while the averages of past returns can inform predictions, they may not reliably forecast future performance.
Analysis indicates that the substantial returns between 1950 to 2000 were primarily driven by rising valuations, which are unlikely to be repeated. High valuations often suggest that future expected returns will be lower rather than higher—an aspect often overlooked by optimistic investors.