Contrary to popular belief, earnings growth has a very low correlation with decadal stock returns. The primary driver is the change in the valuation multiple (e.g., P/E ratio expansion or contraction). The correlation between 10-year real returns and 10-year valuation changes is a staggering 0.9, while it is tiny for earnings growth.

A fundamental reason for differing investor behavior is the unit of discussion. Bond investors focus on forward-looking yields, which naturally fosters a contrarian, mean-reverting mindset. Equity investors focus on backward-looking prices and returns, leading them to extrapolate recent trends and chase momentum.

The 0-12 month market is hyper-competitive, while quantitative models lose predictive power beyond five years. The 2-5 year timeframe is ideal for value strategies like special situations and mean reversion, offering a balance of predictability and reduced competition.

Barclays' quantitative equity timing model, "BETTI," is in record warning territory. It indicates the two-month forward return profile for the S&P 500 is poor, with a low probability of gains and a negative average return. This is driven by extreme momentum crowding and stretched equity valuations relative to high real yields.

Contrary to standard finance theory, historical data across many countries shows no consistent equity risk premium. Stock and bond returns are driven by independent factors, meaning investors should analyze their potential returns separately rather than assuming stocks will automatically outperform bonds by a set margin.

The modern market is driven by short-term incentives, with hedge funds and pod shops trading based on quarterly estimates. This creates volatility and mispricing. An investor who can withstand short-term underperformance and maintain a multi-year view can exploit these structural inefficiencies.

Long-term economic predictions are largely useless for trading because market dynamics are short-term. The real value lies in daily or weekly portfolio adjustments and risk management, which are uncorrelated with year-long forecasts.

Future bond returns are highly predictable. The current yield on a 10-year bond provides a reliable forecast of its annualized return over the next decade. This is because capital gains from falling rates are offset by lower reinvestment yields, and capital losses from rising rates are offset by higher yields.

Across 200 years and 56 countries, the single most important factor for long-term investing success is the starting valuation. Buying portfolios with low P/E ratios or high dividend yields consistently outperforms buying expensive assets by 3-4% annually over the long run.