John Ralfe (“Peering at Eton’s £100mn bet”, FT Alphaville, FT.com, September 29) criticises Eton’s decision to borrow by assuming that the risk of investing in equities is the same over the long as it is over the short term.
This is invalid if real equity returns are mean reverting. Mean reversion cannot be proved but it can be shown to be highly probable based on the 220 years of data which we have for the US stock market.
While Ralfe should not have ignored this point, it is also habitually ignored by supporters of the consensus model of economics. As Ciaran Driver, the Soas professor and author, notes in his paper for the Cambridge Political Economy Society, “macroeconomics does not seem embarrassed to ignore inconvenient findings.”
Another issue is whether the impact of unpredictable events, such as world wars, should be considered as these have depressed past returns, particularly in Japan and Germany, below the US level.
The desirability of leveraging also depends on timing as it is better to borrow when cheap markets are combined with low bond yields rather than, for example today, when equities are exceptionally expensive.
The issue is therefore complicated and deserves the space for a serious discussion.
Andrew Smithers
London W8, UK