Customer Reviews

Probable Outcomes

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It is difficult to give a mediocre review to someone as insightful as Ed Easterling. However, I found little new in this update to his Unexpected Returns. This may partly be because Mr. Easterling's web site at Crestmont Research provides quarterly updates to his vast set of research and also because the overall market dynamic of a long-term bear market punctuated by artificially-induced cyclical bull markets continues. Unexpected Returns is by far the better book and contains the full set of his charts (incredible use of graphics). If you have read and understood UR, then there are no new insights here.

However, because Mr. Easterling provides all his research for free online, perhaps the money spent on this book can be seen as a contribution back to him for his great services to investors.

Probable Outcomes: Secular Stock Market Insights by Ed Easterling is a follow-on to his excellent book Unexpected Returns: Understanding Secular Stock Market Cycles.

The book begins by reviewing and elaborating on how to understand and identify what drives secular stock market cycles. Students of secular market cycles or those who follow Easterling's work Unexpected Returns: Understanding Secular Stock Market Cycleswill recognize the key theme of these chapters: those who invest hoping to achieve the long-term "average" returns for the stock market will feel lucky (or smart) during secular bull markets that typically produce mid-teens average annual returns and frustrated (or give up trying) during secular bear markets that typically produce zero or negative real returns.

In the first few sections, the author reviews the characteristics of these secular markets, describing what economic conditions drive changes in P/E multiples and thus eventual returns to the stock market over time. A discussion about various states of potential economic growth and inflation could have been improved with a more global perspective on what will drive future changes to the U.S. economy. Easterling spends considerable time discussing the difference between the widely used Cyclically Adjusted P/E produced and popularized by Robert Shiller ([...])Irrational Exuberance and his own version which aims to improve on the widely used (but often ignored) measure. While some market geeks will appreciate this debate and find Easterling's measure more compelling (as I did), the nuance is probably lost on most readers and may be distracting. The middle chapters of Probable Outcomes also includes a few timely gems like a discussion of divergences of current Earnings from normalized trend and evaluating stocks using the concept of Present Value that will give both novice and seasoned investors something to chew on.

The real meat of the book comes in Sections four and five where the author leads a discussion on assessing the current valuation of the market, likely economic trends, and the implications for future returns. While the book was published using year end 2009 data, the conclusions remain suitable and poignant while all of the charts are updated on the author's website, [crestmontresearch]. The author addresses each of the major investor groups from early accumulators to retirees to pension plan sponsors and describes the key issues each group should be aware of when attempting to navigate a secular bear market. Whether you belong to one of these groups, or make a living advising them, Easterling gives you the information you need to act and the inspiration to do so.

Easterling does an excellent job of presenting the likely challenges investors will face over the next decade, the prospect for low or even negative annual returns, and why a low-volatility, absolute return approach will help us navigate the markets. Probable Outcomes is a book that belongs on any serious investor's book shelf and should be referenced frequently.

Book Source: I received a copy of Probable Outcomes because I asked for it. The review was done of my own volition.

Ed Easterling has done it again; provided a big picture approach to the market using time-tested historical data and sound principles. Ed's first book, Unexpected Returns, was the first time I had heard of the way secular markets were defined - by valuations. Probable Outcomes expands and updates the first book. Easterling builds a methodology that is robust and clearly void of preconceived notions about the future; a refreshing approach rarely seen in books about the stock market.

The first part of the book is a lesson in market finance and economics from a practitioner view and not the usual financial academic approach - again quite informative and refreshing. Every concept is supported by data and colorful charts, which make learning and understanding the process enjoyable. He spends a great deal of time and effort to ensure that his explanations are easily understood and succinct.

Secular markets are driven by long-term trends in Price Earnings ratios (PE), which, in turn, are driven by inflation/deflation. This removes the scale of time from the secular cycle definition and only uses the trends and cycles of PE and inflation as the identification of secular bear, and bear market cycle beginnings and endings. Simply, a secular bear begins when valuations peak and reverse because of a trend back toward low inflation, then continue to decline throughout the secular period. Once sufficiently low, usually single digit PE, a new secular bull period can begin.

The book wraps up with a thorough evaluation of how the current decade (2010-2019) could possibly play out (currently in a secular bear), using a large number of different EPS, PE, and Inflation combination scenarios. The message is clear, there are times (secular bears) that one needs to change their perspective on investing and seek an approach that at a minimum preserves capital so that when the next secular bull market begins, time is not spent trying to recover from the past secular bear.

It is sad that most people spend a large part of their investing time trying to recover from previous losses. Understanding the secular approach and making the switch in your investing style (rowing vs. sailing) can lead to a long retirement accompanied by dignity and comfort.

For the macro, top-down investor this book crystallizes what drives the major cycles in the markets. The information that one learns from this book is timeless, because it represents data collected for over a century. Added to that is the fact that the information presented is fundamentally based on human emotion and fundamental growth limitations. The most important piece of information that I came away with was that the market cycles are driven by valuation, and they are not time dependent. Ed Easterling doesn't come across as being either a perma-bull or a perma-bear - he just presents the facts. With my doctorate degree in the sciences, I sincerely appreciate his data driven approach. This is one of the best books in this field that I've read. Ed's earlier book "Unexpected Returns" deserves the same accolades although there is some overlap between the two books.

Easterling takes a difficult topic and makes it simple with excellent graphs and charts to illustrate that we're in a secular bear market that will likely last a lot longer. He convinces the reader that a "buy and hold and hope" approach to portfolio management will likely not work in our future.

Those of us that will be receiving a government pension should take note of his explanation of how government pensions are calculated, and how a lower than expeceted rate of return environment will profoundly affect the ability of governments to pay.

Easterling's explanation of "safe withdrawal rates" from a portfolio will help readers to better plan for their retirement. You will learn to stay out of what he calls the "ROOM." (Running out of money)

After 35 years as a financial advisor, I can tell you that this book will satisfy the seasoned professional, as well as the non-financial reader. Easterling is a master at making the complex simple, and the color graphs and charts are such a pleasure.

This is the book you've got to read to understand longer term (secular) price trends and why it's crucial to pursue active risk management and absolute return strategies like systematic trend following. It's why we do what we do.

It is uncommon for research of this caliber to be shared with the world. I wrote a review on Easterling's first book "Unexpected Returns" in 2005, which is absolutely essential reading for all investors. In fact, we've long since given copies to our investors to read and I've used it for training other portfolio managers. Probably Outcomes is kind of a sequel to Unexpected Returns and once again: it's an essential update. It's crucial for investors to understand the state of the long term trends. Easterling warned in his 2005 book: passive buy and hold strategies are likely to cause pain to your wallet. And it did. Easterling provides the likely course for the stock market this decade giving investors well informed expectations. I strongly recommend it so you understand the possibilities and why it's crucial to pursue active risk management and tactics to row, not sail.

The history already speaks for itself for those who were prepared. What I said in the 2005 review of Unexpected Returns still holds true today and is probably more obvious: "Traditional "buy and hold" relative return strategies rely on the direction of the markets. They enjoy gains when they occur, suffer loses when the market declines, and require a long time horizon that many investors don't have. Skill-based tactical strategies seek gains regardless of market direction using investment manager skill in sector rotation, hedging strategies, and risk management. As Ed says in the book, when the wind is blowing we can let out the sails and enjoy the ride. When the wind stops blowing, you can sit there and wait the wind to come again, or you can get out the ores and start rowing. Based on current technical and fundamental research, it seems the wind may not cast our sails and the ores are now necessary to get where we want to go."

I enjoyed Ed's recent effort. It includes updated insights into the equity market and new insights into municipal pensin funding, the problem wiht Monte Carlo simulations, and the safe withdrawal rate. The book is easily read by non-professional investors. I recommend reading of his Unexpected Returns for a more detailed presentation of the model.

I have read several dozen investing books over the past 5 years as I tried to understand the surrent investing environment. "Probable Outcomes" combined with "Unexpected Returns" are two of the best books that I have come across". As I understood more of the relationships of P/E ratios, inflation, interest rates, and business cycles I began to create my own charts showing the relationships. In "Probable Outcomes", Mr Easterling brings them together. I now find the information from Crestmont and Easterling as some my one of primary sources of understanding the secular bear market and how to position my investments for the future. - Lynn

I very much enjoyed reading Probable Outcomes, and found it to be an informative journey through many facets of the investing world, but always coming back to the core focus of the book. Our firm and clients will benefit greatly from the valuable insights pulled from your excellent research and brilliantly written book.
I found Ch 3 on the economy as one of the most thought-provoking. Laying out the facts and historical context of the key economic data series that drive stock returns really helps to tune out the noise and focus on what really matters.
Ch. 9 was excellent and provided very useful updates to some material that I had previously studied on your website.
Anytime I thought the book was about to simply revisit an area from your first book, I was pleasantly surprised by either the additional insight that you added to the topic or a new way of illustrating the same concept. (Ch 10 had examples of this)
I loved the fact that the book touched on so many different topics (briefly, but concise enough to be useful to readers) such as Monte Carlo, MPT, etc... that have been widely misunderstood and misapplied.
The seriousness of the Practical Implications chapter and SWR discussion should be required reading for anyone who is at the helm of a retiree's asset allocation policy and managing investments.
Overall, the book did an excellent job of providing relevant data and insight into the current status of the financial markets and the probable outcomes based on solid historical data and core economic/market principles that are so lacking in most commentary and market analysis.
Some could say the book was not specific enough in the outcomes or the actionable ideas. But they would be missing the point of the book in my opinion. One of the best results of reading the book was the notes I made in the margins and the thought-provoking aspect of putting forth the big picture and then laying in other pieces that can influence these such as trends in savings rates, demographics, debt to income ratios, spending multipliers/tax multipliers.. etc.
So much uncertainty goes into the major uncertainties that you identified, it was refreshing to have such a concise presentation of the items that do really matter to long term returns.
Thanks for writing another superb book that will be re-read and referenced over and over again.

Every Financial Advisor who has an Ibbotson chart in his/her office should read this ... as well as institutional consultants. The industry belief is "you receive 10% return from stocks in the long run". The book is a wake up call to that flip belief.
Some very technical and some basic - so pick and choose the chapters that are new to you.
Jeff, CFP and portfolio manager