Feb

14

Triumph of the Optimists: 101 Years of Global Investment Returns, by Elroy Dimson, Paul Marsh, and Mike Staunton, is considered by many to be the best book written about markets and in so many ways it actually is. The authors went to great lengths to collect the most accurate data available from sources including century-old newspapers and dusty books from university libraries among others. Their efforts were very rewarding in the sense that their findings debunked some mainstream beliefs.

In general, this is an outstanding work and one of the best-researched books on markets to date. It suffers none of the biases that previous research by Fama and French or Malkiel and O'Shaugnessy were guilty of, namely the easy data bias: the bias from incorrect rights-issue adjustment, bias of hindsight choice of companies, bias of hindsight choice of sector, and survivorship bias. All these biases are so well covered in the book that there is no need for me to repeat or explain them here. In this sense, the book is exemplary research and the authors deserve to be applauded for their efforts.

The book was recommended first by Victor Niederhoffer in his posts to the list and in his book as the best book written about markets. And in terms of data accuracy and elimination of biases I have to agree with Victor. No other book I am aware of before the trio came close to offering such a comprehensive study of markets with this impeccable accuracy, even uncovering the beauty of ever-changing cycles in some cases, as with the small cap out performance that stopped working once widely discovered, and its return in 2000 and so forth.

But (didn't you see this coming?), there is some critical observation I have about the trio's great research. In the few cases the authors gave their personal opinions and played the forecaster's role, they failed miserably as there was no empirical support whatsoever.

One notable example in one of the most crucial segments of the first part of the book, The Conclusion, the authors mention that an optimist as stated by Archy the cockroach is a guy that has never had much experience, and in this spirit they state, "statistical logic tells us that future expectations must lie below today's optimists' dreams. We cannot expect the optimists to triumph in the future. Future returns from equities are likely to be lower. As Archy the cockroach warned us, experience should teach us realism not optimism.

How deflating. After reading this conclusion I felt as if I had such a build up of pleasure with the great data provided, but failed to climax reading the conclusion. Isn't 101 years of data over 16 countries a sufficient dose of realism? Didn't their own research show how the stock market outperformed through two world wars, a Wall Street crash and Great depression, hyperinflationary and economic turmoil?

Yet the authors don't expect the future to be as rosy and they call it realism. I believe the authors' opinions were influenced by the tech sector crash prior to the book's publication. Other examples include their conclusion about value versus growth.

This is a great book only if you can skip the authors' opinions and concentrate on the data. I may well be the guy who has never had much experience. As in Archy the cockroach, the authors referred to but failed to provide me with empirical reasons not to be the optimist as opposed to realist according to their definition above. In fact, their research and data make me believe that, if anything, the next hundred years should even be better that the past, given the overall political stability (please don't thow at me the war in Iraq or the Israeli-Palestinian conflict, since they fade in compared to two world wars). The great technological advances are the universal availability of information for executives to make more informed decisions.

From Steve Ellison: 

In one important respect, the 21st century has a head start on the 20th century: the number of people engaged in trade. Thomas P. M. Barnett, in The Pentagon's New Map, identified three periods of globalization.

The first was "proto-globalization" from 1871 to 1914 involving Western Europe, the United States, and Canada. After the two world wars came "Globalization I," involving approximately the same countries plus Japan. "Globalization II," since 1980, has brought China, Korea, India, Russia, and Brazil, among others, into the global economy. One would expect the trend of increasing international trade, if not reversed, to increase wealth creation and opportunities for profit.

From Stefan Jovanovich: 

Dr. Barnett is the perfect theorist for an age when no one knows any history. Free trade had its most dramatic worldwide expansion in the period from the abolition of the Corn Laws to the adoption of Imperial Preference. The period of "proto-globalization" that Barnett refers to was precisely the period when the clear advantages of open economic exchange began to be overridden by the kind of awful grandiose geopolitical doodling that led to WWI and is still the essence of all "strategic planning." Barnett's popularity is, alas, one of those terrible hints that the anarchy of growing international trade is once again about to be brought to heel by the superior wisdom of the people who have seen the latest Power Point presentation. 


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