Triumph of the Optimists : 101 Years of Global Investment Returns

Investors have too often extrapolated from recent experience. In the 1950s, who but the most rampant optimist would have dreamt that over the next fifty years the real return on equities would be 9% per year? Yet this is what happened in the U.S. stock market. The optimists triumphed. However, as Don Marquis observed, an optimist is someone who never had much experience. The authors of this book extend our experience across regions and across time. They present a comprehensive and consistent analysis of investment returns for equities, bonds, bills, currencies and inflation, spanning sixteen countries, from the end of the nineteenth century to the beginning of the twenty-first. This is achieved in a clear and simple way, with over 130 color diagrams that make comparison easy. Crucially, the authors analyze total returns, including reinvested income. They show that some historical indexes overstate long-term performance because they are contaminated by survivorship bias and that long-term stock returns are in most countries seriously overestimated, due to a focus on periods that with hindsight are known to have been successful. The book also provides the first comprehensive evidence on the long-term equity risk premium--the reward for bearing the risk of common stocks. The authors reveal whether the United States and United Kingdom have had unusually high stock market returns compared to other countries. The book covers the U.S., the U.K., Japan, France, Germany, Canada, Italy, Spain, Switzerland, Australia, the Netherlands, Sweden, Belgium, Ireland, Denmark, and South Africa. Triumph of the Optimists is required reading for investment professionals, financial economists, and investors. It will be the definitive reference in the field and consulted for years to come. Need for an international perspective......Page 16 The historical record......Page 18 Inside the markets......Page 20 The equity premium......Page 21 Sixteen countries, one world......Page 23 The world’s stock markets today......Page 24 The world’s bond markets today......Page 27 Why stock and bond markets matter......Page 31 The world’s markets yesterday......Page 32 Industry composition: 1900 versus 2000......Page 36 Stock market concentration......Page 41 Summary......Page 45 Good indexes and bad......Page 47 Index design: a case study......Page 49 Dividends, coverage, and weightings......Page 51 Easy-data bias in international indexes......Page 53 Measuring inflation and fixed-income returns......Page 56 Summary......Page 57 The US record......Page 58 The UK record......Page 61 Stock market returns around the world......Page 63 Equities compared with bonds and bills......Page 64 Investment risk and the distribution of annual returns......Page 67 Risk, diversification, and market risk......Page 69 Risk comparisons across asset classes and countries......Page 72 Summary......Page 74 Inflation in the United States and the United Kingdom......Page 76 Inflation around the world......Page 78 US treasury bills and real interest rates......Page 81 Real interest rates around the world......Page 84 Summary......Page 85 US and UK bond returns......Page 87 Bond returns around the world......Page 92 Bond maturity premia......Page 94 Inflation-indexed bonds and the real term premium......Page 97 Corporate bonds and the default risk premium......Page 100 Summary......Page 102 Long-run exchange rate behavior......Page 104 The international monetary system......Page 106 Long-run purchasing power parity......Page 108 Deviations from purchasing power parity......Page 109 Volatility of exchange rates......Page 111 Common-currency returns on bonds and equities......Page 113 Summary......Page 116 Local market versus currency risk......Page 118 A twentieth century world index for equities and bonds......Page 121 Ex post benefits from holding the world index......Page 124 Correlations between countries......Page 127 Prospective gains from international diversification......Page 130 Home bias and constraints on international investment......Page 133 Summary......Page 136 The size effect in the United States......Page 137 The size effect in the United Kingdom......Page 139 The size effect around the world......Page 142 The reversal of the size premium......Page 144 Seasonality and size......Page 148 Summary......Page 151 Value versus growth in the United States......Page 152 Value and growth investing in the United Kingdom......Page 155 The international evidence......Page 158 Summary......Page 161 The impact of income......Page 162 US and UK dividend growth......Page 165 Dividend growth around the world......Page 167 Dividend growth, GDP growth, and real equity returns......Page 168 Dividend yields around the world and over time......Page 170 Disappearing dividends......Page 171 Summary......Page 174 US risk premia relative to bills......Page 176 Worldwide risk premia relative to bills......Page 179 US risk premia relative to bonds......Page 182 Worldwide risk premia relative to bonds......Page 184 Summary......Page 186 The prospective risk premium......Page 189 Why the risk premium matters......Page 190 How big should the risk premium be?......Page 192 Measuring the premium......Page 194 Arithmetic and geometric premia......Page 196 The changing consensus......Page 198 History as a guide to the future......Page 201 Expectations of the risk premium......Page 203 Summary......Page 206 Market risk in the twenty-first century......Page 208 Inferences from other markets......Page 212 What does the future hold?......Page 215 Implications for individual investors......Page 217 Implications for investment institutions......Page 220 Summary......Page 222 The cost of capital......Page 224 Corporate investment decisions......Page 228 Corporate financing decisions......Page 230 Summary......Page 232 Long-term returns......Page 233 Key messages......Page 235 Conclusion......Page 237 PART3.PDF......Page 0 Our global database......Page 240 Australia......Page 242 Belgium......Page 247 Canada......Page 252 Denmark......Page 257 France......Page 262 Germany......Page 267 Ireland......Page 272 Italy......Page 277 Japan......Page 282 Netherlands......Page 287 South Africa......Page 292 Spain......Page 297 Sweden......Page 302 Switzerland......Page 307 United Kingdom......Page 312 United States......Page 319 World......Page 324 References......Page 329 About the Authors......Page 344 Index......Page 346 Introduction and overview 16 Need for an international perspective 16 The historical record 18 Inside the markets 20 The equity premium 21 Sixteen countries, one world 23 World markets: today and yesterday 24 The world鈥檚 stock markets today 24 The world鈥檚 bond markets today 27 Why stock and bond markets matter 31 The world鈥檚 markets yesterday 32 The US and UK stock markets: 1900 versus 2000 36 Industry composition: 1900 versus 2000 36 Stock market concentration 41 Summary 45 Measuring long-term returns 47 Good indexes and bad 47 Index design: a case study 49 Dividends, coverage, and weightings 51 Easy-data bias in international indexes 53 Measuring inflation and fixed-income returns 56 Summary 57 International capital market history 58 The US record 58 The UK record 61 Stock market returns around the world 63 Equities compared with bonds and bills 64 Investment risk and the distribution of annual returns 67 Risk, diversification, and market risk 69 Risk comparisons across asset classes and countries 72 Summary 74 Inflation, interest rates, and bill returns 76 Inflation in the United States and the United Kingdom 76 Inflation around the world 78 US treasury bills and real interest rates 81 Real interest rates around the world 84 Summary 85 Bond returns 87 US and UK bond returns 87 Bond returns around the world 92 Bond maturity premia 94 Inflation-indexed bonds and the real term premium 97 Corporate bonds and the default risk premium 100 Summary 102 Exchange rates and common-currency returns 104 Long-run exchange rate behavior 104 The international monetary system 106 Long-run purchasing power parity 108 Deviations from purchasing power parity 109 Volatility of exchange rates 111 Common-currency returns on bonds and equities 113 Summary 116 International investment 118 Local market versus currency risk 118 A twentieth century world index for equities and bonds 121 Ex post benefits from holding the world index 124 Correlations between countries 127 Prospective gains from international diversification 130 Home bias and constraints on international investment 133 Summary 136 Size effects and seasonality in stock returns 137 The size effect in the United States 137 The size effect in the United Kingdom 139 The size effect around the world 142 The reversal of the size premium 144 Seasonality and size 148 Summary 151 Value and growth in stock returns 152 Value versus growth in the United States 152 Value and growth investing in the United Kingdom 155 The international evidence 158 Summary 161 Equity dividends 162 The impact of income 162 US and UK dividend growth 165 Dividend growth around the world 167 Dividend growth, GDP growth, and real equity returns 168 Dividend yields around the world and over time 170 Disappearing dividends 171 Summary 174 The equity risk premium 176 US risk premia relative to bills 176 Worldwide risk premia relative to bills 179 US risk premia relative to bonds 182 Worldwide risk premia relative to bonds 184 Summary 186 The prospective risk premium 189 Why the risk premium matters 190 How big should the risk premium be? 192 Measuring the premium 194 Arithmetic and geometric premia 196 The changing consensus 198 History as a guide to the future 201 Expectations of the risk premium 203 Summary 206 Implications for investors 208 Market risk in the twenty-first century 208 Inferences from other markets 212 What does the future hold? 215 Implications for individual investors 217 Implications for investment institutions 220 Summary 222 Implications for companies 224 The cost of capital 224 Corporate investment decisions 228 Corporate financing decisions 230 Summary 232 Conclusion 233 Long-term returns 233 Key messages 235 Conclusion 237 PART2.PDF 1 Our global database 240 Australia 242 Belgium 247 Canada 252 Denmark 257 France 262 Germany 267 Ireland 272 Italy 277 Japan 282 Netherlands 287 South Africa 292 Spain 297 Sweden 302 Switzerland 307 United Kingdom 312 United States 319 World 324 References 329 PART3.PDF 1 About the Authors 344 Index 346 'Brilliant.'—Time'By far the most important investment book in years.'—Bloomberg Money'A book that belongs on every investor's bookshelf.'—MSN.comAn essential and authoritative account of a century of investment returns in sixteen countries—the U.S., the U.K., Japan, France, Germany, Canada, Italy, Spain, Switzerland, Australia, the Netherlands, Sweden, Belgium, Ireland, Denmark, and South AfricaInvestors have too often extrapolated from recent experience. In the 1950s, who but the most rampant optimist would have dreamt that over the next fifty years the real return on equities would be 9% per year? Yet this is what happened in the U.S. stock market. The optimists triumphed. However, as Don Marquis observed, an optimist is someone who never had much experience. In Triumph of the Optimists, renowned investment authorities Elroy Dimson, Paul Marsh, and Mike Staunton extend our experience across regions and across time. They present a comprehensive and consistent analysis of investment returns for equities, bonds, bills, currencies, and inflation, spanning sixteen countries, from the end of the nineteenth century to the beginning of the twenty-first. This is achieved in a clear and simple way, with over 130 color diagrams that make comparison easy.Crucially, the authors analyze total returns, including reinvested income. They show that some historical indexes overstate long-term performance because they are contaminated by survivorship bias and that long-term stock returns are in most countries seriously overestimated, due to a focus on periods that with hindsight are known to have been successful.The book also provides the first comprehensive evidence on the long-term equity risk premium—the reward for bearing the risk of common stocks. The authors reveal whether the United States and United Kingdom have had unusually high stock market returns compared to other countries. The book covers the U.S., the U.K., Japan, France, Germany, Canada, Italy, Spain, Switzerland, Australia, the Netherlands, Sweden, Belgium, Ireland, Denmark, and South Africa.Triumph of the Optimists is required reading for investment professionals, financial economists, and investors. It will be the definitive reference in the field and consulted for years to come. Presents An Analysis Of Investment Returns For Equities, Bonds, Bills, Currencies, And Inflation, Spanning Sixteen Countries From The End Of The Nineteenth Century To The Beginning Of The Twenty-first. Includes Analysis Of Total Returns, Including Reinvested Income. Provides Evidence On Long-term Equity Risk Premium: The Reward For Bearing The Risk Of Common Stocks. Ilustrates The Analysis With Diagrams And Tables. Pt. 1. 101 Years Of Global Investment Returns -- Ch. 1. Introduction And Overview -- Ch. 2. World Markets: Today And Yesterday -- Ch. 3. Measuring Long-term Returns -- Ch. 4. International Capital Market History -- Ch. 5. Inflation, Interest Rates, And Bill Returns -- Ch. 6. Bond Returns -- Ch. 7. Exchange Rates And Common-currency Returns -- Ch. 8. International Investment -- Ch. 9. Size Effects And Seasonality In Stock Returns -- Ch. 10. Value And Growth In Stock Returns -- Ch. 11. Equity Dividends -- Ch. 12. The Equity Risk Premium -- Ch. 13. The Prospective Risk Premium -- Ch. 14. Implications For Investors -- Ch. 15. Implications For Companies -- Ch. 16. Conclusion -- Pt. 2. Sixteen Countries, One World -- Ch. 17. Our Global Database -- Ch. 18. Australia -- Ch. 19. Belgium -- Ch. 20. Canada -- Ch. 21. Denmark -- Ch. 22. France -- Ch. 23. Germany -- Ch. 24. Ireland -- Ch. 25. Italy -- Ch. 26. Japan -- Ch. 27. The Netherlands -- Ch. 28. South Africa -- Ch. 29. Spain -- Ch. 30. Sweden -- Ch. 31. Switzerland -- Ch. 32. United Kingdom -- Ch. 33. United States -- Ch. 34. World. Elroy Dimson, Paul Marsh, Mike Staunton. Includes Bibliographical References (p. 316-329) And Index. This will become the definitive empirical basis for analysis of the world's capital markets over the twentieth century. It is an important work of scholarship; no one else has calculated the equity premium of a large number of countries over the long term. In doing so, the book contributes to the very lively debate on the magnitude of the equity premium and will make a splash.(William Goetzmann, Yale University )