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Triumph of the Optimists

Triumph of the Optimists: 101 Years of Global Investment Returns

Elroy Dimson
Paul Marsh
Mike Staunton
Copyright Date: 2002
Pages: 352
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  • Book Info
    Triumph of the Optimists
    Book Description:

    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 Optimistsis required reading for investment professionals, financial economists, and investors. It will be the definitive reference in the field and consulted for years to come.

    eISBN: 978-1-4008-2947-7
    Subjects: Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. Preface
    (pp. xi-xii)
    Elroy Dimson, Paul Marsh and Mike Staunton
  4. Part One: 101 years of global investment returns

    • Chapter 1 Introduction and overview
      (pp. 3-10)

      The year 2001 was scarred by terrorism, and financial markets were beset by turmoil. As we look to the future, investors have more cause than ever to ask: Where are the markets heading? What returns can be expected from equities, bonds, and bills around the world? What are the long-term risks of stock and bond market investment? What are the likely long-term rewards?

      Corporations also need answers to these questions to understand what returns their stockholders and bondholders require, and to ensure they raise and use capital to best effect. Similarly, these are crucial issues for governments, since market returns...

    • Chapter 2 World markets: today and yesterday
      (pp. 11-33)

      This book is about the long-run performance of equities, bonds, bills, inflation, and exchange rates around the world over the 101-years from 1900–2000.

      Our story begins at the end of our 101-year period by looking at world markets as they stand today. In sections 2.1 and 2.2, we examine the world’s stock and bond markets in terms of their size and significance and the split between markets and countries. This helps set in perspective the importance of the markets and the sixteen countries covered in this study.

      In section 2.3, we review why these huge markets exist and what...

    • Chapter 3 Measuring long-term returns
      (pp. 34-44)

      Good measures of long-run returns should accurately reflect the outcome of an implementable investment strategy. The strategy should be one that could have been set up in advance, and followed in real life, and which is representative of the asset class and country in question. It is only too easy for researchers to fail to meet these criteria.

      This chapter begins in section 3.1 by setting out the principles that need to be followed in constructing long-run return indexes. These provide a benchmark for assessing previous studies, and have been the guiding framework for this book. Given that our data...

    • Chapter 4 International capital market history
      (pp. 45-62)

      In this chapter we provide an overview of capital market history over the 101 years from 1900 to 2000 for the sixteen countries covered by our study. We examine the performance of the main asset classes—equities, bonds, and bills—in both real and nominal terms, and draw comparisons across countries.

      Sections 4.1 to 4.4 deal with the investment performance achieved by our sixteen countries, while sections 4.5 to 4.7 focus on the accompanying risks. Given the importance and dominance of the US capital markets, we begin in section 4.1 by examining the investment returns on US stocks, bonds, and...

    • Chapter 5 Inflation, interest rates, and bill returns
      (pp. 63-73)

      In this chapter, we take a closer look at the returns on two of our five asset classes, consumer goods and treasury bills. The return on—or change in the prices of—consumer goods provides a measure of inflation, while the return on treasury bills is the short-term interest rate. Inflation and interest rates are closely linked, and both are key investment benchmarks.

      Investors care not just about the number of dollars they earn from an investment, but also what those dollars will buy. Inflation indexes provide the benchmark needed to compare purchasing power over time. If inflation were low,...

    • Chapter 6 Bond returns
      (pp. 74-90)

      Bonds are an important asset class. As we saw in chapter 2, the combined value of the world’s bond markets at the turn of the millennium exceeded $31 trillion. In many countries, the size of the bond markets and the volume of trading in bonds exceed those of equities. This is not a new phenomenon. Even at the start of the twentieth century, bonds seemed a natural, and often the preferred, investment for individuals and financial institutions. But sadly, the twentieth century turned out to be a far from benign period for bond investors.

      Our focus is mostly on long-term...

    • Chapter 7 Exchange rates and common-currency returns
      (pp. 91-104)

      So far, we have examined long-run investment from the perspective of domestic investors in our sixteen countries. For example, in chapter 4, when we looked at long-run equity and bond returns, the international comparisons we drew were between the real returns earned by US investors from investing in US equities and bonds, UK investors holding UK equities and bonds, and so on. Our numeraire was local purchasing power, measured in local currency, such as dollars, pounds, and marks.

      For the international investor, fluctuations in asset prices must be converted from the local currency into the currency in which portfolio performance...

    • Chapter 8 International investment
      (pp. 105-123)

      Today, the United States has the world’s largest equity market. Even so, US equities comprise less than half the world’s total. US investors who restrict themselves to their home market are thus ignoring over half the world’s opportunity set, and foregoing the risk reduction benefits from international diversification. The case for international investment seems even more compelling for investors from smaller markets such as the United Kingdom, France, or Denmark.

      While these arguments may seem persuasive, what is the historical evidence? This chapter addresses the question of how investors from around the world, including the United States, would have fared...

    • Chapter 9 Size effects and seasonality in stock returns
      (pp. 124-138)

      In this and the following two chapters, we focus on three important aspects of equity investment. This chapter deals with the effects of size and seasonality, chapter 10 concentrates on the performance of value and growth stocks, and chapter 11 is concerned with dividends and dividend growth.

      Why have we chosen to devote a chapter to size and seasonality? The main reason is that the size effect has over the last twenty or more years become the best-documented stock market anomaly around the world. As Ibbotson Associates (2000) state, “One of the most remarkable discoveries of modern finance is the...

    • Chapter 10 Value and growth in stock returns
      (pp. 139-148)

      Chapter 9 presented the evidence on the small firm effect. Low-capitalization companies provided a high return up to the 1980s; however, after this effect was publicized, low-caps did not do so well. In the 1990s value-based strategies came to prominence. In this chapter we look at the performance of stocks that appear “cheap” relative to investment fundamentals. In particular, we examine the returns from investing in stocks whose price is low relative to recent dividends, earnings, or book value.

      Since the earliest days of security analysis, experts stressed the potential benefits of buying at a price that is reasonable relative...

    • Chapter 11 Equity dividends
      (pp. 149-162)

      In this chapter, we take a closer look at dividends. We saw in chapter 10 that dividends play a central role in equity investment and valuation. Our focus there was value investing. Our concern here is rather different. We concentrate on the dividend stream itself, namely, the income that is received by long-run investors who hold the overall equity market, without any tilt toward or away from high-yielders.

      We begin in section 11.1 by examining the impact of dividend income on US and UK investors’ long-run rates of return. We show that although year-to-year performance is driven by capital appreciation,...

    • Chapter 12 The equity risk premium
      (pp. 163-175)

      Investment in equities over the 101 years from 1900–2000 has proved rewarding but, as we have seen, has been accompanied by correspondingly greater risks. In this chapter we examine the historical rewards that investors have enjoyed for bearing this risk.

      Clearly, investors do not like volatility—at least on the downside—and will be prepared to invest in equities only if there is some expected compensation for their risk exposure. We can measure the reward for risk that they have received in the past by comparing the return on equities with the return from risk free investments. The difference...

    • Chapter 13 The prospective risk premium
      (pp. 176-194)

      In chapter 12, our focus was on the historical risk premium, namely, the premium that investors in different countries have obtained in the past from investing in equities, rather than in less risky assets such as treasury bills or government bonds. In this chapter, we switch from the past to the future, and to the prospective risk premium that investors can reasonably expect to obtain over future years and decades.

      In the run-up to the millennial year, there was a series of books with titles likeDow 36,000,Dow 40,000, and evenDow 100,000(see, for example, Elias, 2000, and...

    • Chapter 14 Implications for investors
      (pp. 195-210)

      Why are stocks thought to perform so much better, over the long run, than government securities? The explanation is that the equity premium has been large relative to stock market volatility. InValuing Wall Street, Smithers and Wright (2000) define the stable value of the historic real return on common stocks as “Siegel’s constant,” ors. They explain: “We cannot know with certainty what the true value ofsactually is, but we know that it cannot lie too far from our best estimate of 6¾ percent… Whysis, or appears to be, so stable is an important challenge.”...

    • Chapter 15 Implications for companies
      (pp. 211-219)

      We have analyzed the long-term performance of the main asset categories in many different national environments, political situations, economic regimes, and historical settings. This has revealed the historical magnitudes of asset returns and their inter-relationships. We have examined returns and premia from the perspectives of an investor in a single country who invests in his or her home market, a domestic investor who holds a portfolio invested in a single foreign market, and an investor whose portfolio is globally diversified. In the process, we have uncovered the long-term record on company size, industry composition, value/growth orientation, and other facets of...

    • Chapter 16 Conclusion
      (pp. 220-224)

      Our book is constructed around prices that are determined in financial markets. Markets are infinitely fascinating to observe but frustrating to analyze. Each time a relationship becomes apparent, there is the danger it may change. Every lasting law may turn out to be a temporary trait. In this chapter we pull together some laws of the market that are likely to pass the test of time, and we draw contrasts with temporary attributes that may be more obvious with the benefit of hindsight than they were before they were noted.

      In section 16.1 we summarize the main findings of the...

  5. Part Two: Sixteen countries, one world

    • Chapter 17 Our global database
      (pp. 227-228)

      In this second part of the book we provide an overview of the long-term performance of each individual market. We list our data sources, covering equities, bonds, bills, currencies, and inflation, and present salient features of the database that we have compiled for each country.

      As explained earlier in section 3.4, our data series are remarkably comprehensive. We span five assets in each of sixteen countries. For no fewer than seventy-nine out of eighty asset/market combinations, we are able to estimate total returns for all 101 years from 1900 to 2000, the sole exception being Swiss equities, where the data...

    • Chapter 18 Australia
      (pp. 229-233)

      The data for Australian equities are described in Officer’s chapter in Ball, Brown, Finn, and Officer (1989). Ball and Bowers (1986) provide a complementary, though brief, historical analysis. We are grateful to Bob Officer for making his database available to us, and also to Ray Ball and John Bowers for providing their own data for Australia.

      Officer compiled equity returns from a variety of indexes. The early period made use of data from Lamberton’s (1958) classic study. This is linked over the period 1958–74 to an accumulation index of fifty shares from the Australian Graduate School of Management (AGSM)...

    • Chapter 19 Belgium
      (pp. 234-238)

      Annaert, Buelens, de Ceuster, Cuyvers, Devos, Gemis, Houtman-deSmedt, and Paredaens (1998) are researching long-term Belgian returns. We are grateful for access to their interim results, which are subject to correction. The background to this study at the University of Antwerp’s SCOB center is described in Buelens (2001).

      For 1900–14 equity returns and capital gains we use SCOB’s stock indexes (see van Nieuwerburgh and Buelens, 2000). The 1914 return runs to July, and equity prices then remain unchanged over the period of the First World War. Data for 1919–25 are from GFD. From 1926 we use the National Bank...

    • Chapter 20 Canada
      (pp. 239-243)

      Canadian stocks, bonds, bills, and inflation since 1924 are presented in Brealey, Giammarino, Maynes, Myers, and Marcus (1996). The underlying source for much of the data is Panjer and Sharpe (2001), with supplementary data kindly compiled for us by Lorne Switzer. We also received valuable help from Pat O’Brien.

      For 1900–13 the annual index returns are based on Switzer’s equally weighted (2000) Montreal index, adjusted for dividends. The equity series for 1914–46 is taken from Urquhart and Buckley (1965). Houston (1900–14) provides dividends for 1900 and hence the Canadian yield premium relative to the 1900 US Standard...

    • Chapter 21 Denmark
      (pp. 244-248)

      We are grateful to Claus Parum for extensive help, and have drawn heavily both on Parum (1999a,b), and also on his more recent research extending back to 1900 (Parum, 2001). We have also referred to the papers by Steen Nielsen and Ole Risager (1999, 2000) and utilized part of Allan Timmermann’s (1992) series.

      Over the period 1900–14 we use Parum’s (2001) equally weighted index of equity returns, which covers some forty to fifty constituents each year. Thereafter, all the studies cited above are based on equity price indexes from Statistics Denmark, though we incorporate Parum’s adjustments for capital changes...

    • Chapter 22 France
      (pp. 249-253)

      The primary studies that we use for France are Laforest and Sallee (1977), for the first half of the twentieth century, followed by Gallais-Hamonno and Arbulu (1995) for the period commencing in 1950. We are grateful to Georges Gallais-Hamonno for sending us his database, which underpins the computations presented here.

      The common basis for equities is the index series compiled by the Institut National de la Statistique et des Etudes Economiques (INSEE). The INSEE equity index is a weighted average of price relatives with about three hundred constituents. We use the SBF-250 from 1991 onward.

      The bond series for France,...

    • Chapter 23 Germany
      (pp. 254-258)

      The primary source is Gielen’s (1994) real, dividend-adjusted equity return series. George Bittlingmayer provided the older data, and Richard Stehle gave us more recent data.

      Gielen computes German equity returns for 1900–13 from the Donner index (see Bittlingmayer, 1998). For August 1914–18 Gielen uses an over-the-counter index, after which the nominal series of theStatistisches Reichsamt. Beginning in 1924 a broad index is used until June 1943, but in January 1943 prices were essentially frozen until trading recommenced after the war. Share prices held up in the west, and for 1945–48 we use West German index data....

    • Chapter 24 Ireland
      (pp. 259-263)

      The first long-run asset return study for Ireland is by Shane Whelan (1999), who uses Irish Central Statistical Office (CSO) data from 1934, and UK data before that. Thomas (1986) provides some additional early data, but only in graphical form.

      We therefore create a new, market capitalization-weighted index of Irish equity prices for 1900–33. Our prices are taken from theIrish Times, and we follow the procedure outlined for the United Kingdom in chapter 32, making full adjustments for capital changes. Seventy securities were listed in theIrish Timesof 1899, and of these, twelve railway and banking stocks...

    • Chapter 25 Italy
      (pp. 264-268)

      Panetta and Violi (1999) compiled the data for Italy. We are grateful to Fabio Panetta for making the underlying database available to us for the purposes of this book.

      The equity data for 1900–07 are from the Official List and supplementary sources, and this is extended through 1911 with data from Aleotti (1990). From 1912–77 the share price and dividend series are based on the Bank of Italy index, which covers at least three-quarters of the total market capitalization of the Italian equity market. Thereafter, the Bank of Italy’s index is calculated from the bank’s monthly share price...

    • Chapter 26 Japan
      (pp. 269-273)

      Japanese data of good quality is available from the Hamao (1991) database, and from the studies by Schwartz and Ziemba (1991) and Ziemba and Schwartz (1991). However, these data sources require substantial augmentation to cover the century as a whole. We are grateful to Kenji Wada for facilitating provision of pre–First World War equity data.

      For 1900–13 we use the Laspeyres price index for the Tokyo Stock Exchange, as published in Fujino and Akiyama (1977). Thereafter, share prices are represented by the Japan National Bank index for 1914–32; the Oriental Economist Index from 1933 until September 1946;...

    • Chapter 27 The Netherlands
      (pp. 274-278)

      For The Netherlands we use the study by Eichholtz, Koedijk, and Otten (2000), to whom we are grateful for making available their database. We also thank Frans van Schaik for advice on Dutch capital market history.

      The equity returns over 1900–18 are based on the Central Bureau of Statistics (CBS) general index of share prices, and historical yield data. For the period 1919–51 returns are based on the 50-stock, CBS weighted arithmetic index. The exchange was closed from August 1944 to April 1946, so the end-year index levels are represented by the intra-year values that are closest to...

    • Chapter 28 South Africa
      (pp. 279-283)

      Returns for South African stocks, bonds, bills, and inflation since 1925 are presented in Firer and McLeod (1999) who, in turn, draw on the earlier work of Schumann and Scheurkogel (1948) that goes back to 1910. We thank Colin Firer for allowing us to use his database, and for his generous help in accessing South African data sources.

      These studies cover industrial and commercial stocks. South African mining and financial companies are also very important, especially early last century. We therefore create a market capitalization weighted index of the thirty to fifty largest mining and financial shares for 1900–59,...

    • Chapter 29 Spain
      (pp. 284-288)

      Gonzalez and Suarez (1994) present evidence on Spanish stock returns from 1941. Valbuena (2000) provides a longer-term perspective, but his study is as yet incomplete. Santiago Valbuena helped generously with interim estimates that are subject to future amendment.

      Valbuena's equity index for 1900–18 is from Bolsa de Madrid. We add a dividend yield that is estimated as the Spanish bond yield minus 0.52 percent, which is the average Spanish yield gap over the period 1919–34. For 1919–36 we use a total returns index from Valbuena (2000) that rectifies some problems in the Sandez and Benavides (2000) index....

    • Chapter 30 Sweden
      (pp. 289-293)

      The authority for Sweden is Per Frennberg and Bjorn Hansson’s (1992a,b, 2000) database of returns on stocks, bonds, bills, and inflation over the period 1919–99. We are grateful to both authors for making their data available, and also to Adri de Ridder for advice on the Swedish equity risk premium.

      The Swedish stock market was founded at the end of 1900, and we assume that stock prices did not move over 1900; thereafter we use the index values of the SwedishRiksbank.Although Moller (1962) provides some early data on Swedish equity dividends, this is limited in scope. Over...

    • Chapter 31 Switzerland
      (pp. 294-298)

      Our data for Switzerland rely predominantly on the series spliced together by Daniel Wydler (1989, 2001) and on extra data he kindly provided to us.

      Our equity returns commence at the end of 1910. Over 1911–17 we use the Swiss National Bank index. The Swiss exchanges were closed during September 1914 to December 1915, so for end-1914 and end-1915 we use the index at the date closest to the year-end. We add a dividend yield for 1911–17 that is estimated as the Swiss short-term interest rate plus 1.21 percent, which is the average yield difference between Swiss equities...

    • Chapter 32 United Kingdom
      (pp. 299-305)

      For the United Kingdom, it was clear that there was a need for a long and consistently compiled equity return series. With support from ABN AMRO, we therefore created a new index that adheres to the guidelines presented in section 3.1. The basis for our study of the UK market is a database that comprises two elements. To compile share prices for the period starting in 1955, we use the fully representative record of equity prices maintained by London Business School. This database covers several thousand shares, and is described in Dimson and Marsh (1983). The London Share Price Database...

    • Chapter 33 United States
      (pp. 306-310)

      The standard study for the United States, covering the period since 1926, is the Ibbotson and Sinquefield (1976) article and subsequent Ibbotson Associates updates. The broadest index of US stock market returns prior to 1926 is the one presented in Wilson and Jones (2002), and we use the latter for this study. We are grateful to Jack Wilson for providing us with his database.

      Earlier sources are described in Goetzmann, Ibbotson, and Peng (2001). Our series, however, commences with the Wilson-Jones index data over 1900–25. For 1926–61 we use the University of Chicago’s Center for Research in Security...

    • Chapter 34 World
      (pp. 311-315)

      This chapter sets out the returns from worldwide investment in our sixteen-country world equity and bond indexes from the perspective of a US investor. The home currency is thus US dollars, and the inflation rate is as for the United States. The short-term risk free rate is taken as the return on US treasury bills. By using the approach described in section 7.6, it is easy to construct an equivalent set of worldwide returns from the perspective, and in the currency, of investors from each of the other sixteen countries covered in this book.

      Our world equity series comprises a...

  6. References
    (pp. 316-330)
  7. About the Authors
    (pp. 331-332)
  8. Index
    (pp. 333-339)