With the passage of time, major changes have taken place in the economic, political and investment patterns. Major scientific and technological innovations (such as the Internet) and challenges (such as climate change) evolve with typical cycles of economic growth, inflation and interest rates. In other words, despite so many changes, the patterns of economic activity and return on financial assets continue to cycle through the cycle. To sum up, here are some important experiences.

What can we learn from the past?

• The return of assets to investors depends on a number of factors, the most important of which may be the time span and initial valuation of the investment. The longer investors are happy to hold their investments, the higher the volatility-adjusted rate of return is likely to be.

This is particularly important for equity investors. Stocks bought at the height of the tech bubble in 2000, for example, had the worst 10-year returns in more than 100 years because their initial valuations were too high. Similarly, the Japanese stock market (Nikkei 225) is about 45% below its 1989 peak. The S & P did not return to its 1929 level until 1955. Although these are extraordinary moments in history, most of them can be attributed to valuations.

It is not difficult to understand that, on a risk-adjusted basis, peak valuations (1929, 1968, 1999) are often followed by periods of very low returns, while very low market troughs (1930, 1973, 2008) are often followed by periods of very high returns.

• Since 1860, the average annualized total return on u.s. stocks has been about 10%, over an one-to 20-year holding period.

For 10-year government bonds, the average return on the same holding period is between 5% and 6%. Although the volatility-adjusted return of stocks is much lower than that of bonds in the short term, investors usually get a return for taking risks in the long run.

• Stock markets (and other asset classes) tend to fluctuate periodically for a long time.

As the economic cycle matures, each cycle can usually be further divided into four stages, each of which reflects different drivers:

(1) despair period, at this stage, the market changes from peak to trough, also known as bear market.

(2) the hope period, the short period in which the market rebounds from the trough through multiple expansions (an average of 10 months in the United States and 16 months in Europe), is crucial for investors because it is usually the stage of achieving the highest returns in the cycle and usually begins when macro data and profit performance of the corporate sector are still depressed.

(3) the period of growth, usually the longest (49 months in the United States and 29 months in Europe), when profits begin to grow and boost returns

(4) the optimism period, the final stage of the cycle, when investors become more confident and may even become complacent, valuations tend to rise again and outpace earnings growth, which usually lasts 25 months in the United States.

• It is important to avoid a bear market because stock returns are highly concentrated in the stock cycle.

The change in annual rate of return can be huge. The lowest annual return on the post-war S & P index was-26.5% (1974) and the highest was 52% (1954). History shows that over time, avoiding the worst months is as valuable as investing in the best months.

Not all bear markets are the same. We find that, historically, bear markets can be divided into three categories according to their severity and duration: cyclical, event-driven and structural.

Share prices in cyclical and event-driven bear markets typically fall by about 30 per cent, while prices in structural bear markets fall much more, by about 50 per cent.Event-driven bear markets tend to be the shortest, with an average duration of 7 months; cyclical markets last an average of 26 months, while structural bear markets last an average of 3.5 years. Event-driven and cyclical bear markets tend to return to their previous peaks about a year later, while structural bear markets take an average of 10 years to return to their previous peaks.

A bull market can bring strong returns. As a rough rule of thumb, in the us, for example, the average bull market share price has risen by more than 130 per cent in four years, with an annualised return of about 25 per cent. Part of the bull market is driven by sustained valuation growth and can be described broadly as a long-term bull market. The postwar boom of 1945 and 1968 and the deflation of 1982 and 2000 and the long-term prosperity of the end of the "cold war" are the best examples. The bull market trend is less obvious and tends to be more cyclical. We classify them into the following categories:

1. The market is narrow and flat (low volatility, low return). The market is flattened and the stock price is stagnant in a narrow trading range with little volatility.

2. The market is wide and flat (high volatility, low return). This period (usually very long) means that the overall increase in the stock index is small but volatile, with strong rallies and pullbacks (and even mini bull and bear markets).

What can we learn from now?

• Although markets have been prone to cyclical fluctuations, the post-crisis cycle is different in many ways from the past.

On the one hand, the economic cycle is already very long, and in the case of the United States, this cycle is the longest in more than a century. On the other hand, inflation expectations have slowed and bond yields have fallen to record lows. UK long-term bond yields are at their lowest level since 1700, with more than $14 trillion of government bonds now yielding negative. In terms of profit growth and returns, technological innovation has also led to a growing gap between relative winners and losers. Since the financial crisis, the technology industry has been a major source of profit margins and profit growth.

• Since the financial crisis, relatively weak economic growth, relatively low inflation expectations and the economic background of bond yields mean that investors face scarcity of income and growth (because policy interest rates are close to or even below zero):

The number of high-growth companies has decreased compared with before the financial crisis, and overall, revenue growth in the corporate sector has slowed. The combination of these factors leads to the pursuit of the rate of return in the fixed income Xiaobai Maimai Inc market, which is also reflected to a large extent in the performance of growth stocks relative to value stocks.

In both credit and stock markets, the greater the uncertainty about future growth, the higher the premium on quality, meaning that companies with stronger balance sheets are less sensitive to economic cycles. This is likely to continue unless or until economic growth and inflation expectations begin to return to the prevailing levels of the economic cycle before the financial crisis.

• As a result of these changes and the start of quantitative easing, valuations of financial assets have generally risen, which means lower returns in the future.

Zero bond yields are not necessarily good for stocks. Experience in Japan and Europe suggests that lower bond yields push up the required equity risk premium, the extra return investors need to take risk and buy equities relative to government bonds with no risk of default.

Zero or negative bond yields can reduce cyclical volatility, thus affecting the cycle, but at the same time, it makes the stock market more sensitive to long-term growth expectations. If a shock leads to a recession, we may see a much greater negative impact on stock valuations than we have seen in past cycles.

With bond yields at zero or negative, pension funds and insurers are vulnerable to debt mismatch. This may cause some institutions to take too much risk to achieve guaranteed returns, but lower yields can also lead to increased demand for bonds, leading to further falls in bond yields.

Another structural shift has taken place as a result of technological innovation. It is estimated that 90% of the world's data were generated in the past two years. This quickly affects the layout between the relative winners and losers. The biggest companies have become bigger: the combined market capitalization of Amazon.Com Inc, Apple Inc and Microsoft Corp exceeds the annual GDP of Africa (54 countries), and technology stocks dominate the US stock market.

History shows that this is not uncommon. Over time, different waves of technology have divided the dominance of the industry into different stages. it began with financial stocks (1800 to 1850s), transport stocks that reflected the railway boom (1850s to the first decade of the 20th century) and energy stocks (1920s to 1970s).

Since then, technology has dominated except for a short time before the 2008 financial crisis. This is reflected in the evolution from the mainframe (IBM became the most valuable stock in the S & P 500 in 1974) to the personal computer (Microsoft Corp became the most valuable company in 1998) to Apple Inc (the most valuable company in 2012).

What can we expect for the future?

The future financial cycle is not the focus of this book. However, we can observe the past and present cycles to provide some clues to future expectations.

• One of the most consistent observations that can be drawn from past cycles is that valuation is important.

High valuations tend to lead to lower future returns and vice versa. In the post-financial crisis cycle, inflation in product markets is relatively low, while inflation in financial assets is higher (and returns are higher). This unusual combination is partly caused by the same factor: falling interest rates.

• The decline in real interest rates can reflect many factors: an ageing population, a savings glut, the impact of technology on pricing, and globalisation.

At least in part, this also reflects the aggressive quantitative easing adopted by central banks in the wake of the financial crisis.

• This decline in real yields, coupled with a decline in overall growth, makes the economic cycle tend to be longer than we have seen in the past.

At the same time, economies, companies and investors are more dependent on the continuation of these existing conditions. This suggests that investors will face some unusual challenges in the coming years.

• Although a recession is still unlikely in the short term, there is much less room to cut interest rates in the face of economic shocks than in the past, making it more difficult to recover from the downturn.

The government may think that increased borrowing and fiscal expansion are becoming increasingly attractive at a time when financing costs are historically low.

But if such borrowing leads to stronger economic growth, inflation expectations and interest rates are likely to rise from their current historic lows at some point, as bond yields rise to higher levels. could trigger write-downs of financial assets.

• One possible outcome would be a return to the pre-crisis growth rate of economic activity.

This will boost confidence in future growth, but at the same time, it could significantly push up long-term interest rates, increase the risk of write-downs in financial assets and could lead to painful bear markets in equity and bond markets. Another possibility is that economic growth, inflation and interest rates are still very low, as has been the case in Japan in recent decades.

While this may reduce the volatility of financial assets, it is likely to be accompanied by low returns. Given an ageing population and long-term liabilities created by health care and pension costs, the demand for returns is rising, making it harder to get the returns needed without taking more risks.

• Perhaps the biggest challenge will come from the need for climate change and economic decarbonization.

Despite the high cost of such efforts, it also provides important opportunities for investment and economic restructuring to make future growth more sustainable.

• Technological achievements are beginning to emerge.

In the past eight years, the cost of wind power has fallen by 65%, the cost of solar power by 85% and the cost of batteries by 70%. Over the next 15 years, new technologies will not only provide renewable power at a price comparable to fossil fuel power generation, but also provide low-cost backup and storage systems. enable 80% to 90% of power systems that rely on intermittent renewable energy to operate.

• In the long run, investment can make a very high profit even if it has to withstand the fluctuations caused by the cycle. Different assets tend to perform best at different times, and the return will depend on the risk tolerance of investors.

For equity investors in particular, history shows that investors can really enjoy the benefits of long-term returns if they can hold their investments for at least five years, especially if they can identify signs of bubbles and cyclical changes.