Triumph of the Optimists Book Review
“An optimist,” observed Archy the cockroach, “is a guy that has never had much experience.” (Don Marquis, 1934)
Triumph of the Optimists by Elroy Dimson, Paul Marsh, Mike Staunton is the macro-economics book to read. It aims to provide a comprehensive record of past investment returns around the world. Using this information, investors can make informed decisions about the future by analyzing the long term performance of equities, bonds, bills, inflation, and exchange rates. As dry as that might sound, the authors do a great job at making these topics apporachable. I took macro-economics in college and although I’ve probably forgotten most of it, this book is what I would recommend to anyone seeking to grow their knowledge on the topic. For me, this book is a must read for anyone making their own macro-economics course.
The main conclusions from the research are that most people are underdiversified with a home country bias and that we need to use caution moving forward. The optimists have won out for the last 50 years. The observed high equity returns in the past are not likely to continue. The dominance of the USA is an outlier in returns and is not guarenteed to deliver the same performance moving forward.
One of the downsides is the publication date. Written in 2002, there are some points that haven’t held up well. Such as stating that the tech bubble of the late 90s was unlikely to happen again and the conclusion that investors would see reduced returns. While this might be true going forward, economic conditions have made equities a great place to be for the last two decades. Dimson, Marsh & Staunton put out a Credit Suisse Global Investment Returns Yearbook which can help fill the gap for this book being nearly 20 years old.
Selected Notes and Quotes:
All great investing is about knowing something the market doesn’t know.
The outliers of the market are what gives you the return. Indexing gives you exposure to the outliers.
100 years US Market Returns:
- Inflation: 3.2%
- Bills 4.1%
- Bonds 4.8%
- Equities 10.1%
Diversification rapidly reduces risk. International diversification further reduces risk.
From 1900-2000 even the world’s lowest inflation country, consumer prices rose by 2.2% per year.
There is a clear tendency for currencies with a high rate of inflation to devalue relative to currencies with a low rate of inflation.
Four Rate Regimes over 20th Century:
- 1900-14: Gold Standard
- 1914-45: Gold Exchange Standard contained two wars
- 1946-71: Bretton Woods fixed rate system
- 1971-present: petro dollar
We can hope for, but we cannot expect, the optimists to triumph in the future. Future returns from equities are likely to be lower than those achieved in the recent decade