ARTICLE: Beyond the noise - Inaugural lecture Roelof Salomons
Investment theory, on the road to long-term asset management
Distorted data and delusions: short-term investment is speculation, but in the long term things start to become more predictable. This is what Professor of Investment Theory and Asset Management Roelof Salomons claims in his inaugural lecture.
A time series analysis of financial assets shows that the longer the investment horizon, the more ‘normal’ the return distribution. Returns are to some extent predictable with stock valuation methods. This predictability is because of the ‘return to trend’ in valuation variables. If we look at the price/earnings ratio, for instance, we see that high valuations are associated with low expected returns and vice versa. Although these valuations do not say anything about future profits, they do say something about returns, albeit only in the long term.
Salomons believes that extra returns can be achieved within markets too, because these are also predictable, although there is less academic consensus about this. Salomons, ‘Not all that is proven is proof.’ As we know from the theory that returns are predictable in the long term, both at the market level and within markets, and that institutional investors require long-term investments, why then is there still so much focus on the short term? Salomons argues for a return to investment that is based more on fundamental analysis and less on indices, for both long-term investment and the investor in his role as capital creator. ‘Investment is more than numbers on a spreadsheet’, says Salomons.
Dr R.M. (Roelof) Salomons has been appointed Professor by Special Appointment in Investment Theory and Asset Management (a chair sponsored by C.R. Rao Stichting) at the Faculty of Economics and Business. He is Chief Strategist at Kempen Capital Management. This inaugural lecture was held at the University of Groningen, the Netherlands, 14 June 2016.