Triumph of the Optimists

Triumph is a fairly expensive book (over $100) so it is not likely one to be picked up by casual readers. I came across it when Russell Napier, a noted market strategist, recommended it as “essential reading” when he presented to the CFA Society of Baltimore in 2010 (Triumph is also a foundational text in Napier’s two-day course, “A Practical History of Financial Markets”). Calling it “essential” is not an exaggeration. It was produced by three top notch scholars in Elroy Dimson, Paul Marsh, and Mike Staunton and I have more post-it notes highlighting important insights than I do in any other book.

In a similar vein to This Time is Different, Triumph is an intensely insightful quantitative study with verbal summaries that are extremely accessible. In covering market returns for equities, bonds, bills, currencies, and inflation across sixteen countries for a 101 year period, this study provides incredibly valuable perspectives across asset class, time, and geography. Among some of the key findings are: 

• “There is clearly a substantial probability of achieving a negative risk premium, even over long investment horizons” 
• “Many investors take advice from professionals who, like our stockbroker, still have big gaps in their knowledge” 
• “Our assertion in this book, however, is that the equity premium is markedly lower than many people suggest. The reward from passive investing must therefore be lower, in relative terms, than was previously thought” and 
• “Statistical logic tells us that future expectations must lie below today’s optimists’ dreams … Future returns from equities are likely to be lower than those achieved in recent decades."
  

These findings suggest that many of the heuristics and rules-of-thumb that US investors developed in the 1980s and 1990s are unlikely to be well-suited to future economic landscapes. Across a wider range of geographies and the broader context of time, those returns stand out as unusually high and unlikely to recur. This is extremely useful knowledge that can be used to establish more appropriate return and risk expectations.

by David Robertson, CFA