Triumph of the Optimists

[haha]

Since I mentioned this book a month or so ago I have reread it several times. It is huge, full of data, and IMO written kind of opaquely. But my take home is way different from what I get by reading the reviews on Amazon. Like I said before, it is like we read two different books.

His executive summary if it could be called that is in chapter 13. Making certain adjustments to his 101 years of "average equity premia" for the US, and then blending it with historical volatility from both US, UK, and 14 other developed countries, he draws a graph which convinced me at least that Siegel's idea that diversified stocks will always give positive real returns relative to the real return of bills over any 20 year period is false.

It looks as if it might take as long as 50 years to make that statement-- to be certain of besting bills. This is at least partly due to expectations of greater volatility, by informing the estimate not only by history of US and UK, but also other countries. For example, Netherlands showed an average return and average historical risk premium over bills almost as great as that of the US, but with much greater volatility. That alone was enough to make Netherlands stocks safe only "for the very long term", not the "long term" that was the historical case in the US.

Ha

 

[wabmester]

I haven't read the book, but I did post this paper a while back that discuss how long the long-term might have to be for stocks to beat bonds.

How Long is a Long-Term Investment?

Conventional wisdom tells us that stocks tend to outperform government bonds in the long term. That is, if stocks are held long enough, they are usually better investments because their total return is likely to be higher than the return on bonds. While this view may be correct in principle, in practice a crucial question remains: How long is long enough?

The answer is important to every investor, not just the wealthy few. With employers relying increasingly on defined-contribution retirement plans, employees must make their own saving and investment decisions.

Shen reviews historical patterns to show investors how the riskiness of stocks and bonds can change as an investor’s holding period lengthens. First, she explains why stocks are generally considered riskier than government bonds and thus, on average, should pay higher rates of return to attract investors. She then shows why stocks, with their higher average rates of return, tend to perform better over sufficiently long holding periods. Next, she examines the historical patterns of stock and bond returns in the United States. She shows that sufficiently long has been very long relative to most people’s holding periods. Finally, she examines various holding periods in detail. She finds that, for many investors whose holding periods were not sufficiently long, risks for both stocks and bonds were quite high. She concludes that, historically, longer holding periods may have reduced the riskiness of stock investments but not bond investments. Further, for most individual investors, feasible holding periods have seldom been long enough to take full advantage of long-term stock investments.

 

[Nords]

His executive summary if it could be called that is in chapter 13. Making certain adjustments to his 101 years of "average equity premia" for the US, and then blending it with historical volatility from both US, UK, and 14 other developed countries, he draws a graph which convinced me at least that Siegel's idea that diversified stocks will always give positive real returns relative to the real return of bills over any 20 year period is false.

I don't remember that one graph from the book, but the first question that always arises in this sort of discussion is whether dividends were reinvested or not.

Sounds like Dimson had to torture the data a lot more than Siegel, but then Dimson had to deal with 1920s Germany and a host of other currency issues that probably don't keep Siegel awake at night.

 

[haha]

I don't remember that one graph from the book, but the first question that always arises in this sort of discussion is whether dividends were reinvested or not.

His technique dealt with averages of annual total returns.

Ha

 

[Nords]

His technique dealt with averages of annual total returns.

Correct me if I'm wrong, but I think that means dividends were not reinvested.

Which probably lowers the results.