Q&A with co-author John D. Turner | Thursday 30th April 2:30pm - 3:00pm (UK time)

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✅ Have bubbles been concerning you lately?

✅ Wouldn’t you like a professor who specialises in bubbles to review history and give you a method for identifying them?

✅ Wouldn’t you like the opportunity to put your questions to that professor?

If you answered YES to the above then BREAKINGWATERS has you covered.

April’s BREAKINGWATERS book is the Financial Times Book of the Year 2020, Boom and Bust and one of its authors, John D. Turner, will join us for an open to anyone Q&A on Thursday April 30th at 2:30pm UKT.

BOOM & BUST

William Quinn and John D. Turner take us on a riveting ride through the history of financial bubbles, visiting, among other places, Paris and London in 1720, Latin America in the 1820s, Melbourne in the 1880s, New York in the 1920s, Tokyo in the 1980s, Silicon Valley in the 1990s and Shanghai in the 2000s. As they do so, they help us understand why bubbles happen, why some have catastrophic economic, social and political consequences whilst others have actually benefited society. They reveal that bubbles start when investors and speculators react to new technology or political initiatives, showing that our ability to predict future bubbles will ultimately come down to being able to predict these sparks.

That gives us 3 weeks to read - 13 pages a day.

Available in paperback, hardback, kindle and audiobook formats.

We can do this!

Look forward to reading along and chatting with John together!

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Invite details available on registration.

WHAT IS THE EQUITY RISK PREMIUM or ERP?

The equity risk premium serves as a fundamental metric representing the extra compensation investors demand for choosing risky assets over stable, risk-free options. This value acts as a critical price for risk, directly influencing how analysts calculate expected returns, discount future cash flows, and determine the overall worth of a business. Beyond technical valuation, these premiums dictate broader economic behaviors, such as how much capital corporations invest and how governments fund long-term pension obligations. Fluctuations in this rate shift the balance of wealth allocation, moving money between stocks, bonds, and real estate based on perceived safety and reward. Ultimately, the premium reflects a collective judgment on market volatility and investor risk tolerance, making it a cornerstone of both individual financial planning and global policy.

WHAT ARE THE DETERMINANTS OF THE EQUITY RISK PREMIUM?

The paper identifies investor risk aversion as a primary driver, influenced by shifting demographics, consumption stability, and psychological factors like "money illusion" or narrow framing. Macroeconomic conditions also play a significant role, as volatility in GDP growth, inflation uncertainty, and liquidity constraints typically push premiums higher. Furthermore, the passage explores how information quality and the threat of catastrophic events impact market confidence and required returns. Finally, the research highlights the influence of government policy and central bank actions, noting that political instability and monetary shifts can create structural breaks in historical risk patterns.

THE EQUITY RISK PREMIUM PUZZLE

The equity risk premium puzzle describes the massive gap between high historical investment returns and the much lower levels predicted by traditional economic theories. Researchers suggest that this discrepancy might be a statistical artifact caused by focusing on exceptionally successful markets or a failure to account for rare financial disasters. Other theories propose that declining tax rates or unique behavioral tendencies, such as an extreme aversion to losing money, drive investors to demand higher compensation. Some experts argue that alternative utility models, which prioritize stable long-term consumption, better explain why people perceive stocks as being so risky. Ultimately, the text suggests the "puzzle" may stem from flawed mathematical assumptions rather than irrational market behavior. This overview highlights how diverse factors, from investor psychology to market volatility, attempt to reconcile theory with reality.

SURVEY PREMIUMS

The paper explores the use of surveys to estimate the equity risk premium. The research distinguishes between three primary groups: individual and institutional investors, corporate managers, and academics. Findings indicate that investor sentiment often fluctuates based on recent market performance, making these estimates better reflections of the past than reliable predictors of the future. Chief Financial Officers provide an internal corporate perspective, while financial economists and textbooks offer theoretical benchmarks that vary significantly by geography and year. Ultimately, the data reveals a wide range of estimates and highlights that different methodologies and biases can lead to vastly different conclusions about market expectations.

HISTORICAL PREMIUMS

The historical equity risk premium (ERP) approach, estimates future market risk by comparing past stock returns to default-free government securities. The author highlights how different estimation choices, such as the selected time period, the specific risk-free rate used, and the method of averaging returns, lead to widely divergent results. While long-term data helps reduce statistical noise, it may include outdated market conditions, whereas shorter periods are often too volatile to be reliable. The analysis also addresses critical adjustments for inflation and taxes, noting that while nominal values shift, the underlying premium remains relatively stable. Furthermore, the source warns of survivor bias, suggesting that focusing only on successful markets like the United States may result in overinflated expectations. Ultimately, the text argues that while historical data is the standard tool for valuation, it remains a noisy and backward-looking metric that requires careful application.

HISTORICAL PREMIUMS PLUS

This section examines the methodologies and challenges associated with calculating equity risk premiums, focusing specifically on small-cap stocks and emerging markets. The author highlights the historical tendency for smaller companies to outperform, yet notes that this small-cap premium has significantly diminished or vanished in recent decades. Transitioning to global finance, the source discusses whether country risk is a diversifiable factor or a systemic burden that necessitates higher hurdle rates for international investments (relative to the US). It evaluates various metrics for quantifying this risk, including sovereign ratings, credit default swap spreads, and market volatility ratios. Ultimately, the text provides a framework for building a total equity risk premium by augmenting a mature market base with specific premiums for company size or geographic instability.

CHOOSING AN ERP & CONCLUSION

This segment explores the methodologies used to estimate the equity risk premium (ERP), comparing survey, historical, and historical plus approaches. Each method yields different values because they rely on distinct assumptions, such as investor sentiment, past market performance, or current market valuations. The author argues that historical plus premiums generally possess superior predictive power for long-term returns and are essential for maintaining market neutrality in valuations. Conversely, historical averages are often poor indicators of future performance and can lead to systematic errors if applied rigidly. Ultimately, selecting the appropriate premium requires balancing market efficiency beliefs with the specific goals of the financial analysis.

I hope you enjoyed this Breakdown of the March 5th 2026 ERP paper from NYU Stern. Please subscribe to BREAKINGWATERS to get future Breakdowns and other content direct to your inbox.

Note: This article is for educational and informational purposes only and does not constitute investment advice in any way. © BREAKINGWATERS Media Ltd.

The following Breakdown has been sourced from NYU Stern School of Business March 5th 2026 paper, Equity Risk Premiums (ERP): Determinants, Estimates and Implications - The 2026 Edition by Aswath Damodaran.

Morgan Stanley’s Michael Mauboussin and Dan Callahan recently released the paper: Who Is On the Other Side? A Framework for Understanding Market (In)Efficiency, a circa 50-page goldmine of investing insights. I read the paper and took a plethora of notes. I then did a very short overview post on it, but it barely touched the surface. I wanted to put together a Big Breakdown of it as well, as the insights are so interesting and invaluable to investors.

I took the individual sections of the paper and created a dedicated video explainer for each. I thought this would be more useful to anyone wanting to digest the paper’s insights, but who may baulk at the prospect of a 50-page academic report. I hope you find it as fun and insightful as I did.

First: What Game are We Playing (Part 1)

The paper highlights that long-term equity returns reveal that wealth creation is highly skewed, with a tiny fraction of companies generating the vast majority of market value. Analysis of historical data shows that over sixty percent of stocks essentially destroy wealth by failing to outperform risk-free assets like 1-month Treasury bills. This concentration of success means that overall market gains are driven primarily by outsized winners rather than broad corporate prosperity. Furthermore, an evaluation of fundamental earnings suggests that most companies never produce enough profit to justify their initial share prices. Investors must choose between broad index funds, which guarantee ownership of these rare winners but also the losers, or concentrated portfolios that attempt to identify them despite significant volatility. Ultimately, while markets may appear efficient on average, the median company frequently fails to deliver lasting financial value.

Second: What Game are We Playing (Part 2)

The second section examines the evolving structural dynamics of the financial markets and why efficiency is breaking down, no longer supporting traditional efficient asset pricing theories. While historical models assumed that trading volume did not impact stock prices, modern research demonstrates that demand curves slope downwards, meaning large-scale buying or selling significantly influences market value. The author explores how agency theory and institutional behaviours create market inefficiencies that contradict classical assumptions of frictionless trade. Central to this transformation is the massive migration of capital from actively managed funds into passive index funds and ETFs. Furthermore, the source identifies how shorter investment horizons and a surge in retail trading have altered the way shares are valued. Ultimately, they argue that the specific identity and motivation of market participants now play a crucial role in determining stock prices.

They outline 4 ‘edges’ that exist for investors in today’s markets.

Third: Behavioral Inefficiencies

According to Mauboussin and Callahan's paper, human nature causes asset prices to deviate from their true fundamental value. Correlated beliefs and social conformity lead to the "madness of crowds," often resulting in speculative bubbles and subsequent market crashes. The authors highlight the dangers of overextrapolation, where investors wrongly assume that recent performance trends will persist indefinitely (think 2020/21 tech rally). While markets are generally efficient when participant views remain diverse, fragility increases as investors begin to imitate one another’s strategies. Ultimately, they argue that successful investing requires a contrarian mindset and a disciplined focus on data to resist emotional market cycles. Successful navigation of these patterns depends on distinguishing between testable facts and subjective opinions that drive popular sentiment.

Fourth: Analytical Edge

Investors can gain a competitive advantage by exploiting analytical inefficiencies rather than relying solely on private information. They identify differential skill as a primary driver of success, noting that institutional professionals frequently outperform individual amateurs who often suffer from overconfidence and poor data processing. The authors highlight the importance of belief updating, explaining that most people struggle to integrate new facts accurately and instead fall into predictable patterns of overreaction or underreaction. Furthermore, the concept of time arbitrage is presented as a "super power", where investors achieve superior returns by maintaining a long-term perspective that ignores short-term market noise and psychological biases like myopic loss aversion. Finally, they explore the power of narratives, demonstrating how shifting stories about a company’s future can cause massive swings in market valuation independent of immediate fundamental changes.

Fifth: Informational Edge

Informational inefficiencies allow certain market participants to achieve superior returns by exploiting gaps in shared knowledge. While the efficient market hypothesis suggests prices reflect all available data, the authors argue that high costs, limited attention, and task complexity prevent instantaneous price corrections. Through various experiments and case studies, they demonstrate that professional traders often outperform amateurs by better interpreting news and managing the signal-to-noise ratio. Strategic advantages are gained by those who can legally acquire exclusive data, connect disparate pieces of information via the mosaic theory, or identify consequences in complex supply chains. Ultimately, profiting from these discrepancies requires not just early access to facts but the analytical precision to accurately value and act upon them.

Sixth: Technical Edge

Technical inefficiencies create market opportunities when participants trade for reasons unrelated to an asset's fundamental value. These distortions often stem from forced buying or selling, such as the mandatory liquidation of downgraded bonds or the "leverage cycle" where margin calls trigger a chain reaction of automated sales. Additionally, the document highlights how index fund rebalancing and capital flows into or out of investment funds can exert temporary, predictable pressure on security prices. Market gaps also widen when arbitrageurs lack the necessary capital to stabilise prices, a phenomenon exemplified by the collapse of Long-Term Capital Management. Ultimately, the authors suggest that sophisticated investors can gain an edge by identifying these non-fundamental movements and providing liquidity when others are constrained by regulations or debt.

Conclusion

In conclusion, “To generate excess returns, investors should seek easy games where their skill will pay off. In investing as in poker, the key to winning is participating in a game where there is differential skill and you are among the most skilled players. This is a challenge because investing is generally highly competitive, markets where participant skill is low are often small, and agency costs commonly compel the wrong behaviors.

The main goal of this report is to encourage active investors to ask and formulate an informed answer to the question of “Who is on the other side?” We recommend documenting those perceived inefficiencies to measure how well they predict excess returns.”

“𝗦𝘁𝗼𝗰𝗸 𝗺𝗮𝗿𝗸𝗲𝘁𝘀 𝘁𝗿𝘆 𝘁𝗼 𝗰𝗮𝘂𝘀𝗲 𝗮𝘀 𝗺𝘂𝗰𝗵 𝗽𝗮𝗶𝗻 𝘁𝗼 𝗮𝘀 𝗺𝗮𝗻𝘆 𝗽𝗲𝗼𝗽𝗹𝗲 𝗮𝘀 𝗽𝗼𝘀𝘀𝗶𝗯𝗹𝗲.” 📉

If that quote doesn’t resonate with you after last week’s tech rout, then I don’t know where you’ve been!

It comes from a brilliant new book I’ve just finished: “𝗧𝗵𝗲 𝗦𝘂𝗰𝗰𝗲𝘀𝘀𝗳𝘂𝗹 𝗧𝗲𝗰𝗵𝗻𝗼𝗹𝗼𝗴𝘆 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿.”

I’ve read a lot of financial literature, but this one stands out. It’s concise, witty, and incredibly dense with actionable insights. The author, William de Gale of BlueBox Asset Management Global Technology Fund, strips away the hype and focuses on the true value being delivered to the shareholder.

He outlines 10 rules that challenge the status quo. My favorite?

❌ 𝗧𝗵𝗲 𝗠𝘆𝘁𝗵: Buy tech companies with explosive growth.

✅ 𝗛𝗶𝘀 𝗥𝗲𝘀𝗽𝗼𝗻𝘀𝗲: “Please don’t.” (He dedicates a whole chapter to why this destroys wealth).

He admits his suggestions won’t help you pick the biggest winner every year. Instead, his goal is to keep you out of the biggest losers and help you build a portfolio that outperforms over time.

𝘛𝘩𝘦 𝘚𝘶𝘤𝘤𝘦𝘴𝘴𝘧𝘶𝘭 𝘛𝘦𝘤𝘩𝘯𝘰𝘭𝘰𝘨𝘺 𝘐𝘯𝘷𝘦𝘴𝘵𝘰𝘳: 𝘴𝘶𝘨𝘨𝘦𝘴𝘵𝘪𝘰𝘯𝘴 𝘧𝘳𝘰𝘮 𝘢 𝘭𝘦𝘢𝘥𝘪𝘯𝘨 𝘧𝘶𝘯𝘥 𝘮𝘢𝘯𝘢𝘨𝘦𝘳 (to give it it’s full title) is not a tome, but what it lacks in quantity it more than makes up for in quality. I found myself gaining real insights on nearly every page. It’s a book I’ll be keeping on my desk to double-check my thinking.

𝗔𝗻𝗱, 𝗱𝗼𝗻’𝘁 𝗺𝗶𝘀𝘀 𝘁𝗵𝗲 𝗰𝗵𝗮𝗻𝗰𝗲 𝘁𝗼 𝗵𝗲𝗮𝗿 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲 𝗺𝗮𝗻 𝗵𝗶𝗺𝘀𝗲𝗹𝗳.

I am hosting an exclusive webinar with the author in 48 hours (this Friday, 2pm - 2:45pm UKT). We will discuss many topics, including his book, its relevance to today, AI, recent tech volatility, the SaaSpocalypse, and more. We will also take audience Q&A.

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In 1974, a tennis coach named W. Timothy Gallwey discovered something that had nothing to do with backhands and everything to do with how the human mind sabotages success.

The event that got him thinking was an interesting one.

Gallwey’s philosophy wasn’t born in a lab; it was born on the court with a client named Jack.

Jack had a “terrible” backhand. He knew exactly why: his backswing was too high. He had already seen five different pros who told him the same thing. He had the knowledge, he had the desire, and he had the “Self 1” instructions on a loop in his brain. Yet, every time the ball flew toward him, his hand spiked upward.

Gallwey realized that if five pros had failed to fix it with words, a sixth pro offering more words was useless. Instruction was the problem, not the solution.

So, Gallwey tried something radical: he stopped talking.

He led Jack to a glass window and asked him to watch his own reflection while he swung. No critiques, no “shoulds,” just observation. Jack swung, stopped, and looked at the glass in total shock.

“Hey! I really do lift my hand too high!”

It was a staggering moment. Jack had “known” the flaw for years, but he had never observed it without judgment. Once he actually saw the reality - rather than hearing a lecture about it - the correction happened almost instantly. He adjusted his swing to feel “right” in his body, and the habit stuck.

Jack thanked Gallwey for “teaching” him more in twenty minutes than others had in months. But Gallwey realized he hadn’t taught Jack anything. He had simply removed the noise of Self 1, allowing Jack’s Self 2 to see the truth and fix itself.

But who are Self 1 and Self 2?

Self 1 (the "teller") - the conscious, analytical, and often judgmental ego-mind. It is the voice in your head that provides constant instruction, criticism, and evaluation. Its primary traits include: judging every shot as good or bad (“keep your wrist firm, you idiot!”), trying to control every muscle movement through verbal instruction i.e., telling, is best which brings tension to the body, inhibiting peak performance, and it dwells on the mistakes gone by, pulling focus away from the present moment.

Self 2 (the “doer”) - on the other hand, doesn't "think" in words; it operates through images, feelings, and instincts. It is the part of you that caught a ball when you were a child before you knew the laws of physics, and it’s the part that manages the thousands of complex muscle firings required just to stand upright. Self 2 understands imagery over being told, exists in the now, and ultimately lets success happen rather than makes it happen.

In the Inner Game philosophy, the objective isn’t to “make” yourself play well, but to “let” yourself play well. This requires a fundamental shift in trust. You have to trust that Self 2 knows how to hit a tennis ball better than that Self 1 knows how to explain it.

Self 1 can support Self 2, though, by shifting from a critic to a quiet observer. Instead of micro-managing mechanics with verbal “shoulds,” Self 1 can provide a clear visual goal - an image of the desired shot - and then trust the body to execute.

The Inner Game of Tennis was first published in 1974, 52 years ago (yes, that’s right, I’m afraid), but the concepts it presented were revolutionary, and it remains a classic that speaks to so many walks of life. It has elements from ideologies such as the hippy movement, taoism and Stoicism woven through it, but it is presented through a tennis lens, infused with a modern Western drive for continuous improvement.”

For investing, parallels can be drawn with many of the concepts. 3 clear parallels are:

1. Being present - We talk about trusting the process and not focusing on particular investment outcomes within a portfolio, which is akin to the idea of being present. You must always be present in investing, every day the board resets, yesterday’s unattractive opportunities may have tipped into attractive territory as a result of market twists and turns and vice versa.

2. Be objective - no self-criticism and no berating oneself for getting things wrong. As in tennis (as laid out by Roger Federer recently), investing is a game of margins, not illusory perfection or dominance. Winning by small margins consistently compounds to outsized outcomes. Use self 1 constructively to support self 2.

3. Adaptation - is a core concept of the Inner Game of Tennis, as it is with investing thinking. Gallwey argues that habits aren’t changed by fighting them, but by superseding them. He compares habits to a garden: You don’t “fight” a weed to get rid of it. You simply plant a different seed (a new habit) and give it more water and attention than the weed. Eventually, the new plant grows, and the weed withers away naturally. So find the weeds in your thinking and plant new and better seeds.

The Inner Game of Tennis will give you pause for reflection on how you can approach your world. It offers ways of looking at problems from an angle that is frankly much more fun and interesting than berating yourself. Get out there and don’t make yourself perform; let yourself perform!