Guest User

May 7, 2026

Episode 408: Elroy Dimson - Investing & Optimism

Guest User

May 7, 2026

Elroy Dimson is Research Professor of Finance at Cambridge Judge Business School, and Bye-Fellow of Gonville and Caius College, Cambridge. He is Co-founder and Chairman of the Centre for Endowment Asset Management at Cambridge. Formerly, he was Chairman of the Strategy Council for Norway’s sovereign wealth fund, and Chairman of the Policy and Advisory Boards of FTSE Russell. He is Former President of the European Finance Association and an elected Fellow of the Institute of Actuaries and CFA UK. He serves on several boards.

Elroy’s research is on long-horizon investment, endowment strategy, responsible investing, and financial history. Books include Triumph of the Optimists, Global Investment Returns Yearbook, Financial Market History, and Endowment Asset Management. He was co-designer of the FTSE 100 Share index. With Paul Marsh and Mike Staunton, he compiles the DMS Global Investment Returns Database, widely used by financial institutions, researchers and regulators.

Elroy's work has been cited extensively in The Economist, Financial Times, The Times, Wall Street Journal, New York Times, Fortune, Forbes, Barron’s and The Investors’ Chronicle. He recently received the PAM Lifetime Achievement Award for his contributions to the investment industry.

In this episode, we are joined by Elroy Dimson, Professor of Finance at Cambridge Judge Business School and co-creator of the Dimson-Marsh-Staunton (DMS) dataset, for a sweeping and deeply insightful conversation on financial history, market behavior, and the evolution of global investing. Elroy walks us through the origins of the groundbreaking Triumph of the Optimists, the challenges of assembling over 100 years of global return data, and the critical biases that once shaped our understanding of markets. We explore how expanding beyond U.S.-centric data reshaped expectations for the equity risk premium, why economic growth doesn’t necessarily translate into higher stock returns, and what history reveals about diversification, factor investing, and investor behavior. Elroy also shares lessons from his work with major institutions like Norway’s sovereign wealth fund, discusses the surprising long-term outperformance of railways, and offers a grounded perspective on future expected returns. This episode is a masterclass in using history to inform better financial decisions.

Key Points From This Episode:

(0:04:00) Introduction to Elroy Dimson and the significance of the DMS dataset.

(0:05:07) Why understanding financial history is essential for thinking about the future.

(0:05:24) The origin story of Triumph of the Optimists and assembling global return data.

(0:09:06) How long-term datasets are built from academic and commercial sources.

(0:11:33) Survivorship bias in historical indices and why it matters.

(0:13:35) “Easy data bias” and how it leads to overstated historical returns.

(0:15:32) Accounting for failed markets and geopolitical disruptions in global data.

(0:18:33) How global data changed expectations for the equity risk premium.

(0:21:09) Why 20th-century equity returns were a “pleasant surprise.”

(0:22:17) U.S. market dominance and the challenge of extrapolating its success.

(0:24:11) Market composition in 1900 and the dominance of railway stocks.

(0:25:52) Why railways outperformed despite shrinking market share.

(0:29:03) The surprising disconnect between economic growth and stock returns.

(0:31:28) Why investing in recovering markets requires extreme patience and conviction.

(0:33:32) Value investing: historical success and recent struggles.

(0:35:00) Why economic growth benefits many—but not necessarily stock investors.

(0:35:59) The long-term benefits of global diversification.

(0:40:01) Why diversification reduces risk—but doesn’t create returns for everyone.

(0:42:29) Explaining persistent home country bias among investors.

(0:47:46) Industry diversification becoming more important over time.

(0:49:50) The rise and evolution of size, value, and momentum factors.

(0:54:17) Why factor premiums should be monitored—not blindly followed.

(0:57:27) The equity risk premium: why it’s crucial—and uncertain.

(1:00:15) A realistic estimate: ~3% equity risk premium going forward.

(1:02:33) Translating that into ~5% real expected equity returns.

(1:05:10) Staying optimistic: invest long-term and live modestly.

(1:05:58) The risk of pessimism: losing purchasing power in safe assets.

(1:08:06) The evolving role of bonds as diversifiers.

(1:09:55) Why market timing is a losing strategy.

(1:11:00) Elroy’s definition of success: happy children and grandchildren.

Read The Transcript:

Ben Felix: This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer and Braden Warwick, Financial Planning Product Architect at PWL Capital. Welcome to episode 408.

I love the conversation that we just had, Braden, and it's an episode that I have wanted to do for a long time. Professor Elroy Dimson is a busy man. I was on another podcast in the UK, and that person, Damien, is the Damien Talks Money podcast, has a relationship with Elroy, and so he made an introduction, which finally got the connection made.

We would have done this one sooner, if we could have. I guess is the point of my long preamble, but I'm super excited that we got to talk to Elroy Dimson. He is a Professor of Finance and Research Director at Cambridge Judge Business School and Bye-Fellow of Gonville and Caius College, Cambridge.

He is also Emeritus Professor of Finance at London Business School. Listeners will likely know his name. Elroy Dimson, which is the D in the DMS data, which we've talked about many times because we use it a lot in our own research at PWL.

We also did an episode, I can't remember the episode number, but we did an episode a while ago, something like Lessons from 100 Years of Stock Returns or something, where we went through a bunch of their past reports. They do something called the Global Investment Returns Yearbook that they've been publishing for many, many years now. Right now it's sponsored by UBS, formerly it was sponsored by Credit Suisse, but it's this just incredible book that they publish annually that details stock bond and bill returns for a whole bunch of countries all around the world.

They also publish indices, which we, PWL, subscribe to. We purchase them every year, purchase a license to use them, and in their yearbooks, in the Global Investment Return Yearbooks, they also, and he mentions this during the conversation, they also do a couple of essays where they take a topic and they use their historical data to analyze it. So an example would be what is the historical relationship between economic growth in a country and its stock returns or industry growth and stock returns, but they've got tons of these different essays over the many, many years that they've been doing this and it's a wealth of incredible analysis and information.

They've also got a very famous book called Triumph of the Optimists, which we also discussed. That book was the culmination of their work using historical data to reconstruct indexes for a whole bunch of different countries. And we talk about this during the conversation too, it really changed our knowledge of what is the equity risk premium, how much should you expect in stock returns relative to bond returns, which prior to their work had been heavily influenced by the U.S. historical record, which we all know has been incredible, exceptional. And so their expansion to international markets really gave us more knowledge about what it might be reasonable to expect as an equity risk premium going forward, which was great. We're super fortunate and grateful to be able to talk to Elroy. We talked for about 90 minutes. Braden, any comments? What did you think of the conversation

Braden Warwick: I think it was just so cool from my perspective, as someone who's used the DMS data for years now. I use it all the time to just hear the origin story about why he decided to collect the data and all that went into it over the course of time. And then it just really brought the data to life to me to hear his perspective on it. Yeah, it was just such a cool conversation, really a pleasure to talk to Elroy.

Ben Felix: He's got his academic experience, but he's also done lots of interesting investment committee work, including with Norway's Sovereign Wealth Fund. It's the biggest single investor in the world. And he helps to form their whole setup and investment policies and all that kind of stuff.

He's not just an academic. He's got real world experience dealing with people. And he talks about some of those types of issues during our conversation, people and committees and just making like real investment decisions, an incredible wealth of wisdom that comes from both tons of time with the data and doing analysis, but also tons of time working with real humans, trying to make investment decisions based on the data and other inputs.

That's a good introduction for Professor Elroy Dimson. Let's go ahead to our conversation. Elroy Dimson, welcome to the Rational Reminder Podcast.

Elroy Dimson: Thank you for having me. It's a very pleasant afternoon here, but other people are tuning in and will be all over the world, weather may be different where you are.

Ben Felix: It's actually a very nice day where I am as well. So that's good. Real quick, Elroy, super excited to be talking to you on the podcast.

This is something that I've wanted to do for we've been running the podcast for eight years now. You're someone that I've always wanted to have on, super excited that we're talking to you.

Elroy Dimson: Well, it's so exciting for everyone.

Ben Felix: That's good. To start with the first question here, can you talk to us about why it's important to study financial market history when thinking about the future?

Elroy Dimson: It's extremely difficult to think about the future without knowing where you've come from. It's an integral part of a journey. If you don't know where the journey started, you can't start thinking about where you're going to end up.

Braden Warwick: So what was the process like to assemble the data for your 2002 book, Triumph of the Optimists?

Elroy Dimson: That's an interesting story, because when Paul Marsh, Mike Staunton and I, we all did our PhDs at London Business School. Early on in our academic lives, textbooks all made very heavy use of American data, and a little bit of British, and a tiny bit of Canadian data. But basically, if you had, what the then was the standard textbook of Brealey and Myers, which now has another couple of co-authors, you would see some indications to what returns you might expect.

But there was very little choice other than to recite what had happened in the United States. And so there was heavier alliance with the long-term data which had come out of the University of Chicago. Paul Marsh and I had done a bit on looking at the long-term for the UK, and there had been one or two snippets of not very satisfactory research on the UK.

But that was about it, and even Canada didn't really play a part. We at that time distributed our research, which we began at the very end of 1999. We distributed it through a firm which has sort of changed hands a bit.

We have not changed the sponsors much, except when there's been a corporate event amongst the sponsors. It became clear there was a demand to go beyond the American and British data that we had. And we were moving into a period of internationalization.

Money was kind of free at the end of 1999, expecting 2000 to come along. And the global head with our own knowledge of the research that others were doing, and the practitioner who was thinking globally. And we liked that idea, and we worked through the run-up to New Year 2000 on producing a book which was privately published.

First, we had a number of countries, but as we reached the end of 1999, we found that it was creeping up towards 10. The tenth was actually at quite a late stage. Ten countries, for which we had accumulated 100 years, and we thought that's a millennium of data.

And so the millennium year came along that our work got a great deal of publicity. But one of the things which nobody had noticed at the time was when do you celebrate a birthday? So people were talking about the new millennium.

It was a thousandth birthday. Actually, you have a birthday. You are one year old when you're into your next year.

So birthdays actually are calculated differently. And so people pointed this out, and by that time we discovered data for lots of other countries. And the suggestion was we should have a Millennium Book II for the real millennium.

The real millennium was once there were a thousand years behind us. We were in the 1001th or 2001th year. So the story was one of evolution, and that was a big success, Millennium Book II.

Then it was an idea that Princeton University Press thought would be something worth bringing to people. And the book that you know, Triumph of the Optimists, a fiercely expensive book, was produced by us, building on something which we had already done in a private publication. There's still a few people around who have got the original Millennium and Millennium Book II. It pops up on eBay from time to time. The little beginning was once we were into the current century. And we've had 25 years of running with it. It's been an amazing journey

Ben Felix: When you're assembling the data, like when you say you got to 10 countries and you keep adding countries, what are you actually doing? Where is the data coming from?

Elroy Dimson: Our dataset is primarily a compilation of data. So let me go backwards in time. What would we like now?

Nowadays we have high quality indices. And so if you start the particular period, we're going back where there's a good quality capital gains index with an income series. Nobody would dream of telling you what the return is on treasury bill's, excluding income, because it's a dollar. The value every year is dollar, dollar, dollar, dollar, dollar, dollar. So equities people who would manage without income.

And that's really strange. So we wanted data which covers a longer period. We presented our data and I'l tell you a bit about our very detailed data in a moment.

Once we'd got that first book done, there was so much interest in it. We were presenting it all over the place to academics and practitioners. And every so often we'd be in a large room.

Question time comes along. And somebody would say, you know, I've been collecting data like this for my country. It never occurred to me that anybody would be interested.

And so we grabbed. By the time we had our first 10 countries, we had accumulated some long-term return series. But that rapidly went up after that.

We used data which has often been assembled by other people in more recent decades commercially before that. Academics were doing this job. They've been kind to us.

We've been kind to them. We credit their work in great detail. And often we were able to extend it a bit.

So for example, for South Africa, there was somebody who had done a study like the famous Ibbotson and Sinquefield long-term return studies for South Africa starting in 1940. But before 1940, South African shares were traded heavily as well in London. And so it was possible to use data to infill missing data.

And so we've worked in a number of cases with people from other countries to extend the datasets and produce a series which starts at a common date. So primary start date is New Year in 1900. It's drawing on contributions from scores of academics and scores of commercial datasets.

Ben Felix: Yeah, that's incredible. You mentioned excluding income, having just a capital gains index. Other than that, what are some of the biases and other issues that can affect historical index data?

Elroy Dimson: Well, when we first launched our research, we made some remarks about our predecessors' work. That really illustrated some of the challenges you face. So early on, we reported on the premiere index series for the UK.

That was prepared by a predecessor of Barclays Global Investors. They've also changed ownership. That started with a stockbroking firm in the 1950s, hiring some general economists, there weren't financial economists in those days, to produce a long-term history.

And they wanted something which would represent the UK stock markets. The FT, the Financial Times Index, had begun in 1935. And they were going to go back further than 1935, to an earlier date.

They wanted their series to look similar to the standard FT series. We wanted the pre-1935 data to be reflected with reference to the companies which were in the Financial Times Index after it launched. So we had come to this from 1934, 1933, 1932.

And as you went back in time, what the Barclays Global Investors Index or Barclays Capital Index contained was a set of companies that had done well enough to be big and that left out the companies that had died. That index got replaced sometime after our own series came out. But at the time, what we were doing was replacing an inadequate index with one that was adequate.

This is all ancient history. And I dare says lots can live with that. But if he wants me to rephrase anything, he'll tell me.

Ben Felix: That was great on survivorship bias. I love you to talk also about easy data bias when it comes to country indices.

Elroy Dimson: The term "easy data bias" is one that we coined. The easiest data to collect is data which is readily accessible, which is well known. The easy data that people had including this data series for the UK started after a period in which markets had become unreliable, had less information behind them.

So, for example, the Barclays Index, which is still used by some people, it began in life at the beginning of 1919. Why not 1918 or 1917, 1916? There was a war on people, couldn't trust prices.

So, the series began after the wartime turmoil was out of the way. That was easier to do. The data was more reliable.

You take a more extreme case. There was a Barclays publication of a similar nature looking at Germany, which waited until after the turmoil of the Second World War and the succeeding events were out of the way. So, if you look at Germany and you include the recovery period after Germany recovered, but leave out what happened in the war, you again have a misleading number.

And so, we discovered that almost everywhere, almost every country, was one where if you use the standard index over the standard period, that was easier to do. You didn't have so much in the way of data collection, but performance was very overstated compared to what happened if you imposed a common start date on all of the different markets that you looked at. I would say that that is the most important of the biases that we eliminated, but there are others as well.

Braden Warwick: So, what about stock markets that don't survive or succeed? What happens in that case? And how does that affect global average stock returns?

Elroy Dimson: If you take markets which are important at the date you're compiling data, you're more likely to incorporate ones that have done well and more likely to leave out ones which had started tiny and got smaller still. But it's advised there in terms of choosing markets, which is similar to the choices you have to make within a stock market looking at individual stocks. There are relatively few markets that simply didn't succeed leaving out the couple of major geopolitical casualties.

The demise of the Russian stock markets was important. The acquisition by the state of not only Russian, but Chinese resources when China moved towards a communist framework. But mostly there aren't markets which start up, do okay, and then just completely disappear.

There've been one or two and I could give you anecdotes along those lines. We make sure that we include everything. And so, our histories now cover significantly over 98% of the market capitalization of global equity markets in 1900 and they're equally comprehensive today.

So, missing countries is not a problem. What is important is how you do the calculations. So, if a market loses some of its assets, for example, Austria lost the Hungarian assets, but the Austrian market continues.

We want to make sure that we're using the right index and reflecting what went wrong. If we're looking at the world index, we need to include the Russian or the Chinese stocks that became valueless. In just the same way as if you were looking at a conventional single country index, you take in those companies which became valueless.

And that part of the index calculation, the same is true for the global series.

Ben Felix: That's crazy. It's a lot of really looking at what actually happened in that country to figure out what should be included in the calculation.

Elroy Dimson: Well, the back histories I think are tricky. And if you look at the early attempts at back histories which were typically done by general business economists or economic historians, they were perhaps less critical of the data that they were using. Nowadays, financial history is a big thing.

People are much more aware of the dangers of finding ways of losing data and inadvertently having misleading results in the index history.

Ben Felix: So, we go from U.S. market data, maybe some U.K. upward biased U.K. market data, being the norm, what everybody knew. How did your work on long-term global returns change our understanding of expected stock and bond returns?

Elroy Dimson: Well, let's go back to the book that we were talking about. We called it Triumph of the Optimists. We thought that book shined for the optimists.

We did that because we have a century of data. If you looked at the beginning of 1900 and you asked who was investing in financial assets, it would have been a small number of optimists who thought the commercial and industrial companies would do well. And a much larger group of people who were cautious.

If you look at U.S. endowments 100 years before, you would find that the endowments were full of bonds. So, the 20th century was one in which optimists, the people who bought common stocks, did well. That does mean that you can now look at our sample data because we put into the market data for the last complete century, the 20th century.

We've now got a quarter of a century out of sample rolling forward, which has been quite good, but not as good as the 20th century. We can also go back in time. And so, some people have been looking at evidence that predates 1900. There's papers by a number of individuals.

As I understand this channel has become a popular location for talking about these historical issues. And it's clear that if you start in 1900 and you go back in time, performance on equities wasn't quite so good either. Our data changed the way people think about the reward for risky investment for the equity risk premium.

And it's still changing because people are now saying, well, it was a good century, but it wasn't quite so good before that. It's difficult going back in time. We've done that using British data, which goes back further.

The attempts of doing the same comparisons for the United States are more difficult, because if you want to cover the 1800s, then you can't find a history for government bonds. That essentially, you can find government bonds weren't part of it. And that's because there were no government bonds and you would have to settle for corporates or the state securities.

And so, doing history also gets to be more difficult the further back you go and requires more and more care.

Ben Felix: In 1900, the optimists end up triumphing, as the title of your book suggests, thinking about how people feel today about the state of the world. Do you think people in 1900 thought that stock returns would be as positive as they were in the future?

Elroy Dimson: No, I think they had a pleasant surprise. It was really in the second half of the 20th century. People would have expected, I think, extrapolating from their experience before and in the early years of the 20th century.

They would have extrapolated from a world in which companies did business, generated income. The income was paid out as dividends. Pretty much everything was income driven.

We then moved into the 20th century proper. And at that point, people were making capital gains. And in part, they were making those capital gains because expectations for the future look rosy and what you would get from investing in common stocks was more than just the dividends that were paid out, but you had rising valuations.

And that must be something which you talk about and write about in your own business.

Ben Felix: Absolutely. It comes up all the time, especially today where the US stock market has obviously had lots of capital appreciation on presumably very, very rosy expectations for the future.

Elroy Dimson: The United States, in all of this is very tricky. I mean, one other form of survivorship is that in the global equity market, although America was one of several large markets back in 1900, fairly rapidly became the biggest one in the world. And it stayed that way with the exception of a very brief period where the Japanese equity market was bigger than any other market.

And so the US has had this amazing history. People who are psychologically attuned to the United States have often said that they think that can only continue. Our expectation was that with 100 very good years from the US, you couldn't expect it to continue and Paul and Mike and I were wrong.

It did continue. It continued until about a year and a half ago.

Ben Felix: I've been saying the same thing for a long time now with US valuations being so high just saying the expected return on the US market must be lower based on where evaluations are. But as you said, returns up until recently continued to be higher than expectations would have suggested.

Elroy Dimson: Once you buy a market, which represents more than all the others put together, you can't imagine anything else, which is as big. Extrapolating to the history that was going to be used for the future, that's a very difficult extrapolation. And yet we really must look at long term stock market histories in a variety of different circumstances.

So we can learn by looking at the different experiences of markets around the world and not just relying on the US.

Braden Warwick: At the beginning of the status series back in 1900, can you describe what the composition of the country weights looked like back then and then how did that evolve over time to get where we're at today?

Elroy Dimson: Well, the biggest market in the world by market cap in 1900 was Britain. There were others that were large, Germany, France and so forth. What did those top markets' valuations reflect?

Well, part of it was the growing network for communications, physical communications in different countries. So the majority of all of US common stocks, majority of all British common stocks by value, was railroad stocks. We had previously had a canal frenzy, canals did very well, but they found themselves, by an English saying, "underwater."

Though within a few decades, railways have come along and although canals were very efficient compared to lousy ground transport being pulled by a horse and cart, you had the same sort of thing where trains were much better than travelling on canals. The trains were very important. I don't think it would have been obvious at the time once there was a railway boom that they would be alternatiaves like trucking or road transport might be alternatives.

But nevertheless, it was a longer period of success for trains in the end. If you'd stuck with it, railways did quite well, but they went through some very, very difficult periods in the middle of the 20th century.

Ben Felix: You have data in one of the yearbooks comparing the performance of railway stocks. I want to say 1900. I don't know. I don't remember the timeline now.

Elroy Dimson: We look at railway stocks from 1900 going forward. And then as soon as there is an industry sector or road transport, which is not as early as 1900, but as soon as that's available, we take that sector index and we start it at the same level on the start date as railways had. And we do the same thing once there's a listed sector on the stock market for airplanes.

So we can have a number of series and what you find is railways did much better than the alternatives, even though nowadays, nobody would think of railway stocks as growth stocks in any sense.

Ben Felix: You show in the yearbook that the market capitalization of railway stocks decreased from being massive to being tiny, but the returns outpaced all those other sectors and the market as a whole. That's just mind-blowing stuff. I love that one.

Elroy Dimson: That's fun. We periodically update that work. Typically what happens when we write these books is we produce an essay or two of particular topics.

Some of those you have acquired because they found their way onto the internet, but we also bring in the long-lived pieces of research. And so the book will increasingly grow to having more and more topics. We never realized that if we happened in long-term history where we could simply ask the history, what was the equity risk premium?

But instead we could look at all sorts of other questions at the time. It's the richness of that data, which we licensed you to use in your own research as well. It can answer a whole variety of different questions, whether you are focused on inflation, emerging markets, and sometimes more esoteric investments, precious metals, artworks, and social.

Ben Felix: Has the railway analysis held up since you first did it?

Elroy Dimson: Yes, the story has remained the same. When you see these graphs of different asset classes or indices moving up over time, so we've got the horizontal axis, which is for the years and the vertical axis is a value, but that vertical axis is always plotted in a logarithmic form. So if you move one inch up the vertical axis on a page, and let's suppose that over that inch on the page, you've got values going up 10-fold, then the next inch on the page will be the 10, becoming 10 times as big, it's 100-fold, and so forth.

So when you see a series, and you're asking me about one particular series, and you see one is winning a great deal compared to others, it needs quite a lot to send them to the back of the queue.

Ben Felix: You had another chart in one of the yearbooks comparing developed market returns to emerging market returns. The fact that emerging markets underperformed to me was just mind-blowing the first time that I read the analysis. The reason that I think it's related to this question is because emerging markets tend to have high economic growth.

Can you talk about the historical relationship between a country's economic growth and its stock returns?

Elroy Dimson: Absolutely. If you know in advance that a country is going to have high economic growth, if you've got a crystal ball, if you can foresee these things accurately, there'll be a good case for buying the stocks, but unfortunately we don't have a reliable crystal ball. We typically extrapolate from the past, and so when we first started looking at emerging markets and comparing them to developed markets, there was a wave of interest in emerging markets as being the future of the growth opportunity, and we never really argued with that. The question is whether as a shareholder, you will benefit from that, and as a shareholder, a stockholder, investor, if you know that there has been a lot of growth in the past, everybody else knows it'll be in the price, and so you will pay more for a growth opportunity.

And so people who buy into an emerging market, which has done well, are coming along too late. So the long term record of emerging markets is surprisingly disappointing. They've got left behind.

Now, what with the big disappointments, if you lose a global war, that can wipe a great deal off your stock market. So the history of Japan, for example, is one in which a huge amount of financial value disappeared during the Second World War. If we stood back from that, we asked what happens if we begin our index series, not in 1900, not in 1940, but in 1960, some point in the 60s, emerging markets have probably moved in line with developed markets, may have actually done a little bit better.

But if you look at the entire series, there were some very substantial losses. It's a warning, really, that there's no guarantee, particularly based on extrapolating from the past, that an investment strategy will pay off going forward.

Ben Felix: We talked a lot about that analysis and about Japan in a past episode, and one of the comments that I made was that it's kind of like a reverse lottery. You might expect higher returns from emerging markets, but you have these occasional big events where one country just gets completely wiped out, and that causes the long term record for emerging markets not to be so great, even if the expected return based on something like valuations is high.

Elroy Dimson: I think there's another twist on this, and that is that you focus on the individual investor, and you focus on people who are using institutional products. So you might want to ask yourself, this is entirely hypothetical, what would happen if you were selling a global fund, let's say it's 1948, and you say, we think Germany looks really good, we suggest you stick a quarter of your assets into Germany. They would have been phoning out for men in white coats to take you out.

Afterwards, we see that if you bought into an emerging market like that, you would have done pretty well, but you would have had to have been ever so brave. It would not have been a saleable proposition to retail investors, and would not have been something, which if you were managing a pension fund or some other scheme and institutionally, you could have pursued. So being concyclical, focusing on cases where there is a scope for a very substantial recovery, you just got to be awfully brave.

At the front of the dilemma, we have looked at the impact of strategies where you systematically buy into stock markets that have done poorly or sectors that have done poorly. The outcome afterwards is two things. First of all, if you've done poorly in the past, it's a more volatile market.

So you're more likely to do very badly. You're also more likely to do very well. But in the long term, if you buy into markets that have collapsed, you will be ahead of the game.

But typically what most investors will do is they'll lose them, they may like that story, they've got to stick with it for a long time. And that mostly is beyond their patience.

Braden Warwick: That's super interesting. We talked about railways already, but more generally, what's the historical relationship between industry growth and stock returns?

Elroy Dimson: It's a similar story to what I was talking about earlier, but if you've got good economic conditions in the country and you know in advance, that's a good idea, the same is true for an industry. But historically, I'm going to caveat this in a moment, but historically, if you bought into industries that were cheap, cheap to find, for example, with an aggregate price-to-book or cheap in relation to dividend yields, historically buying into cheap markets or cheap industries outperformed a little bit. But we've just been through a period where that's been a difficult strategy to sustain.

So if you have been convinced that buying into sectors that are cheap and avoiding or even shorting ones that are expensive, that's not something which would have done very much good for your business.

Ben Felix: Definitely a tough period. We do have a bit of a value tilt on our portfolios, which has been not as good as a growth tilt over the last, I don't know, 10 or so years, although recently, a little better.

Elroy Dimson: Well, last year or so, it was improved.

Ben Felix: Yeah. Yeah. The evidence on country economic growth and industry economic growth with respect to stock returns, it seems like it's just kind of noisy, is maybe even a negative relationship, but it just seems really messy. Why is that? Why doesn't economic growth translate into higher stock returns?

Elroy Dimson: Yeah, that's because economic growth benefits all sorts of categories of people. So if you think back to people who were buying into China, for example, there were people who a couple of decades ago, clear mindedly, could see that China was going to do well. But that does not mean that you necessarily do well buying listed stocks.

Those listed stocks will already have a price that reflects what's going on. So the big beneficiaries will be the equity partners enjoying finishes or maybe individuals who start up their own business. So economic growth can help a country, can help the people, can help sectors and so forth.

The benefits get spread around. Everybody can, to some extent, benefit, except those who go into the stock market, where prices will already reflect the consensus as to what the future holds.

Braden Warwick: Super interesting. Makes a lot of sense. What impact has global diversification had on long-term risk and returns?

Elroy Dimson: I think that's been very important. Again, if you go back a long way, almost every country had a small number of sectors which were important. So it has a very small number of stocks that were important.

It was difficult to get a broad portfolio. Over the years, two things were happening. One is that there were more and more industry sectors.

So if you were to look within one large market such as the United States, there was much more opportunity to create a diversified portfolio because businesses that used to be private by then were listed. And if we think about investing globally, then you could spread the risks that are associated with particular countries or are associated with the resources that particular countries have and diversify those much more effectively. So there's a lot of risk which you might have thought is inherent to investing.

And it turned out a lot of that could be diversified away. You can spread your money around in a way which eliminates many elements of risk which you would not have recognized as diversifiable in the middle of the last century. Diversification has been important and it's been important as there's been a growth in varied investment opportunities.

Some people would say that now because of the very largest companies, there's a little bit less opportunity to diversify. About a quarter of the global equity markets is represented by just 10 companies. Of those 10, 9 are in one country, the United States and one is in Taiwan. You would like to diversify.

There are some sorts of diversifications which are a little bit more difficult. You've got to be brave in the way I was describing it earlier, if you were going to move away from having exposure to those growth companies, we really don't know whether we are in the middle of an upward momentum or whether those stocks have become so expensive that there will be a collapse. We don't know whether we are in early year 2000s confronting a collapse of technology companies of that era or anywhere in the middle of continued ascent by technology companies.

Ben Felix: Can't know the future. In your data, for example, we can look and see that there has historically been a quantitative diversification benefit to global stocks and I picked this question up from reading one of your yearbooks. What effect could frictions like foreign markets being less accessible to investors historically than they are today have on the perceived quantitative benefits that we see in the data of diversification?

Elroy Dimson: Trading costs can impair performance. Performance over the long history that we use at them has been helped by trading being cheaper. Cost drag became something that people talked about.

Although the lower the costs are, the more people are willing to trade while they don't have numbers to share with you, my hunch is that if we looked at the aggregate of cost drag, that is what it costs to do a transaction and the frequency with which they happen amongst investors as a whole, then I think the jury for me, may still be out. It's much, much cheaper to invest globally. But so many people are doing it, and then that could get across to all investors; there may be less of a benefit than you might anticipate.

Braden Warwick: So on that note, how have the benefits of international diversification evolved over time?

Elroy Dimson: International diversification evolved, spreading your money across different markets, different jurisdictions and so forth. There's a lot of resistance amongst American investors to investing in markets which are less promising than the US in the eyes of individuals. But on the other hand, it can't be the case that for everyone, it makes sense for them to avoid diversifying out of their home market.

And so what we can see is that if you had moved into a market which turned out to do well, you prosper. But people who are in the United States who bought foreign stocks may have been persuaded by people like me and my co-authors, risk reduction was worth having and therefore they would be better off if they spread their money into other countries. People did do that from the United States.

It was a little bit more difficult to do from Canada, but those impediments were lifted because people were convinced that global diversification was worthwhile. There were opportunities like that, but it cannot be the case that there is a strategy which makes money for everyone. So in other words, when Americans put their money outside the US, they were buying stocks which were destined to underperform American stocks.

What that means also is that if Europeans or Asians had moved out of their home markets and bought more in the US, they would have bought more the average return experience across all of them. It has to be zero. You can't create returns out of nowhere.

So the role of international diversification is risk reduction and that you can promise.

Ben Felix: On international diversification, why do you think? And I will note that we do have a home country bias in our portfolios. We weight more than the Canadian market capitalization.

We have about a third of our portfolios in Canadian stocks and we have reasons for that which we can talk about if you want, but why do you think investors, and actually one more note on that, our home country bias in our portfolios, which we think is reasonable, is much less than a typical Canadian investor's home country bias who might have 60% of their portfolio in Canadian stocks. Why do you think investors continue to exhibit home country bias when the benefits of international diversification that you just described are so well-known?

Elroy Dimson: Some of it may of course be not rational, just warm feelings, but there may also be other attributes to that. So my answer to some extent is colored by taking an institutional investor perspective. I'm employed by one of the wealthier universities in Europe, which is Cambridge, and Cambridge, when it hires people, has a mix of paying salaries, which are the going rate locally and will stay that way.

And somewhere the going rate is essentially determined globally. The decision as to how much you want exposure to foreign markets compared to political markets, it is something where there isn't a rule that applies to everyone. I think there are individual circumstances which will finesse what you ought to be doing.

I do understand how it applies. For those who have a heavy bond component, I think the story is more compelling as it's being able to diversify out of your home bond market and the foreign bond markets, is taking a view on how exchange rates are going to change. I'm in favor of diversification however it comes, but I can see how fixed income investors it's a little bit more important because you can hedge more effectively.

When it comes to the stock market, I still have some sympathy with people who want to stay at home, but I think the proportions you describe are not high enough. I think back to the time when I was more heavily involved with the Norwegian Sovereign Fund. So I chaired the strategy council for Norway for about a decade, and early on when I was working with the Norwegians, they had a strong Nordic tilt because they were buying and selling goods and services in Scandinavia and nearby, and then over time they came to appreciate that if they bought something which came out of Scandinavia, it came out of an IKEA store, they weren't really too exposed to the Swedish currency because some of that would be made in China. And if you look through that, China was quite heavily linked to the US dollar.

There was a gradual realization that a strong geographic tilt is not in the interest of the Norwegian people compared to being well diversified globally. I would be saying the same thing from Canada, but there are these geopolitical issues which are being wrestled with now how much do you want to be self-reliant within a particular country? The world's so complex now you can probably run another session like this focusing on geopolitical risk, you'll get a lot of listeners.

Ben Felix: That's one of the things that we had Gene Fama on this podcast years ago. There's a tax efficiency, cost efficiency, local currency argument for home country bias, which I think are fine, but Fama brought up that more geopolitical expropriation risk of investing in foreign stocks that I hadn't thought about before. But when he described it, it gave me another reason for a bit of home country bias, I guess.

Elroy Dimson: Early in my career, when hedging currency was in its infancy, we used to focus on back-to-back loans. In other words, a business rather than taking exposure through setting up a subsidiary in another country would borrow in that country and then invest the money. It was for exactly those sorts of reasons that you could end up with expropriation and assets you thought you had.

My wife's family comes from Germany. They were refugees at the outbreak of the Second World War. My late mother-in-law remembered that the first bit of savings that they had took to Switzerland, they put a small amount in a bank, and she wrote a number, which was an account number.

In her final years, my wife's mother was keen to get these savings. So these were, put there, they were 'run-to' money, in case they had to run again. We went from bank to bank and none of them recognized the number. It had been inadvertently expropriated.

We went to the banking ombudsman in Switzerland, and several years later, you hope that they had identified the deposits. There was no explanation as to quite what happened to it. This money, which the young couple who had escaped from Germany at the end of the 1930s, was eventually available much more than half a century later.

This expropriation risk, it's a real dilemma, and it's one which, as a family, we've seen.

Ben Felix: That's a fascinating story.

Braden Warwick: Crazy. How important would you say that industry diversification is relative to country diversification?

Elroy Dimson: I'd say it has become more important. That's because companies find somewhere to list their shares, and so you end up with the listing in locations which are not naturally where they do their profit creation. We have quite a number of years of resource companies being listed on the London stock exchange. Not much in the way of resources that comes out of the ground. In Britain, when you diversify across markets, you're diversifying different sorts of things.

The reality of diversifying across industries now is more compelling than it was. What do people say to you? That must be something which you talk about.

Ben Felix: It's a tough one. We look at different papers and writings, including yours and some of the yearbooks, and it's a tough one. It seems like it changes over time, which I guess you're kind of just describing.

It really comes back to that big question of how important is international diversification. It comes up a lot for US-focused investors and investors in the US who look at, well look how diversified our industrial base is in the United States. We don't need to diversify outside of the country.

That's one of the main reasons that I've looked at this is a well-diversified market, sufficient diversification relative to being diversified across countries. I think I've landed on international diversification is still important, but it's not a super easy question to answer.

Elroy Dimson: It is much much cheaper to invest globally than it was. It may be less important, but it can also be a great deal less costly. The burden in terms of costs to investing in a passive global fund is remarkably low.

The burden therefore for active investors to compete with that is very difficult.

Ben Felix: We've mentioned Dimensional briefly. But you've looked at longer-term historical data than even Dimensional would have had when they started their business. Can you talk about how pervasive the size and value effects have been in historical data around the world?

Elroy Dimson: It's kind of curious that because when Dimensional was quite young in the London market, they supported us collecting value and size data, value data had previously not existed. I coordinated several PhD students to do that. The work honestly was done by year one, year two, year three

PhDs collecting data manually and coordinated by a year zero of PhD. The man that was the year zero PhD was somebody who we had given a place on the PhD program, and he just seemed very well organized. This was a man who subsequently became editor of Journal of Finance, so he was my PhD student.

We ended up collecting data, publishing this in Financial Analysts Journal. I think it probably could have been published somewhere better, but we were in a hurry to get that out. That was the first attempt at a time when, I think in the early years, Dimensional was much more keen on factor effects within the US than thinking globally.

That was still to come. That's the paper on value and growth in the UK. It was complementary to other stuff.

We've looked at performances, you know, you have these checkerboard charts which are popular in the hedge fund world, but we also looked at them year by year, seeing for each year what the best meddling and lowest performance was for different factors. We also do this decade by decade because we've got some data which goes back quite a long way. Some of it a bit further back than the Fama and French material, which Dimensional so timely made available to researchers as well.

The small firm effect was the premier anomaly. It used to be value became a premier anomaly in stock market performance, but that's kind of gone away. It was jumping around for the last handful of years.

The value sort of got left behind quite a lot. The one that was most striking is momentum. What's striking about momentum is there's a big contrast between momentum investing and size and value investing.

For size investing, you buy small caps and you hope that they will outperform. At the end of the year, you can reformulate your strategy, and if you are really lucky, your strategy won't be messed up because some of those small companies won't be small any longer. But basically, you're fairly doomed.

You buy small companies and they'll stay fairly small. Buy value companies and they'll stay fairly value-ish. But you can't do that from momentum because from momentum, you're buying stocks which have trended up, avoiding or shorting stocks which have trended down. There's actually no reason why one which has trended up over time should keep doing that.

So the galaxy would explode. That can't happen. It's a high cost strategy.

Size and value has been overwhelmed by momentum returns, but it's high cost. So whether you do that effectively, if you can control costs very well, then size and value are pushed down. But for a long time, and after Paul Marsh and I created the first small cap index in the UK, which mirrored what Ralph Vance had done as Dimensional was being set up, he had done that for the US, the astonishing performance of small caps, which continued over a very long period, up into about two thirds of the way into the 1980s.

That's all evaporated. That's a fact, and I think we now recognize that there are factors in premium that are attributes which are associated with differential performance, which may be good or may be bad, attributes which may be associated with the premium because they're giving you exposure to stock characteristics that people don't want to be exposed to and therefore makes those stocks more cheap.

Braden Warwick: Do you think the size and value premiums are still worth pursuing today?

Elroy Dimson: I think they should be monitored. If you were looking at institutional active portfolios, then you'll often find that there are inadvertent factor tilts. For example, some charities are constrained to spending income.

What that means is that they run the danger of influencing their asset manager to buy high yielding stocks. So if you're aware of those factor effects, you can discover that in my example, fund manager buys too much of the high yield. That's the only way that the charity can actually access the money that it's making.

But with other similar things, people after small caps have done well want to buy small caps. If they do that through a pooled vehicle, mutual fund or an ETF, small caps are expensive to trade, those strategies can be expensive. And so you need to understand some of these subconscious influences on the way portfolio gets constructed.

I would argue that an active manager that is not particularly persuaded by your dislike for passive management, if not persuaded by your interest in factors, should still be looking at these attributes.

Ben Felix: That reminds me of Mark Carhart and Fama and French both have papers looking at active mutual fund performance through the lens of factor exposures. Is that the line of thinking that you're talking about?

Elroy Dimson: Yes, although what I'm talking about is traditional active managers primarily who accidentally end up with factor tilts. And then factor tilts are essentially bets being made through the portfolio where they didn't actually intend to make those bets. They would do something which they thought was more innocuous and more geared towards the objective plan that have been a lot of investment committees for potential funds and endowments. And I've seen that multiple times over.

Ben Felix: I had a call with a reporter earlier who wanted to talk about equal weighted index funds. And this is one of the things I explained is that you're putting significant factor exposures into place by having that equal weights, but it's sort of a naive tilt. And so I was like, if somebody wants those factor exposures, there's probably a lower cost and more efficient way for them to get there.

Elroy Dimson: Yeah, I mean, but journalists should be aware that if this is a good idea, it would be a good idea two years or six years ago, which would mean that every time any of the magnificent seven do well, you would reduce your exposure. The end of the decades, you would feel much poorer.

Ben Felix: Yeah, I alluded to that too. We talked about the negative momentum exposure that equal weighting is always going to have, which is what you're just talking about. I want to move on to the equity risk premium.

Can you talk about what history tells us about the size of the equity risk premium?

Elroy Dimson: The size of the equity premium at risk premium is very important. If you were trying to build a modern building, you will have steel pillars that support it. But if you were trying to do that in such a way that the ratio of the diameter of those pillars that support a skyscraper, the ratio of the circumference to the diameter, if you wanted to be anything other than 3.1415965, et cetera, you can't do it. So we have a number in investment, which is just as important - it's the equity risk premium. The trouble is that while we know what the value of pi is, we have no real idea as to what the equity premium is. It's even worse than that, because there are lots of different estimates that come out.

They seem to vary a lot over time. We think of these as being long-term attributes, but there are some side advisors who are constantly changing their minds and have got limited opportunity to do their business if the equity premium never changes. So we see lots and lots of calculations.

In the academic world, this has been a source of discussion for 20 years. So start that with Goyal and Welsh, Welsh being based in the US, Goyal nowadays being in Switzerland, who looked at what happened if you didn't peek into the future, but just chose as you went through time to make an investment based on information that at a particular date you've got based on the past. The equity premium that you get if you use long-term data still carries, depending on whether you look at the 21st century, the 20th century or the 19th century.

The sort of numbers that we come up with nowadays are much lower than the spending rules that are followed by many endowments. We could live with 3% as the equity premium, the amounts that equities will throw off relative to safe assets. But 4% is, you'd have to be quite lucky, and in many cases you find endowments that are long-term investors who think that sustainable spending can run at about 5%.

Sustainable spending means money that you can spend without destroying the future of the fund. It is not to do with rainforests or climate change. What we're talking about is how much you can take out of the fund and still leave in a good shape for the future.

Equity premium estimates that we have are, I think, all over the consensus is much smaller than it was. I think there's been gradual agreement, so even the most optimistic of individuals, so you might think we'd generally see one of them as an optimist amongst commentators have brought down their numbers and in other cases their estimates are the reward for equity risk compared to short-term risk-free investments or long-term risk-free investments. It's a smaller number than we used to talk about.

Ben Felix: Historically, that's the risk premium. How does that correspond to the real return on equities?

Elroy Dimson: Well, we can look at the equity premium as the difference between the expected or the realized return on equities, the return on the safe assets. We can do that in real terms or nominal terms, the number will be exactly the same. If you've got a numerator and denominator, which is nominal, you divide one by the other, it doesn't matter if the top half of that fraction and the bottom half of the fraction are scaled by inflation.

The equity premium is fundamental. Whether you are an investor who's focusing on real returns, focusing on the purchasing power of your portfolio, or whether you are focusing on the nominal risks and what's a nominally straightforward low-risk alternative would be.

Ben Felix: Crazy. So, three or four percent equity risk premium?

Elroy Dimson: I think that's already getting high.

Ben Felix: Wow. Three percent.

Elroy Dimson: But there's still plenty of institutional investors in the US who will be talking about five percent. I think to get to numbers like that, you've got to be claiming that you can not only get the equity premium, but you can identify clever managers who outperform the pack. That's hard.

Ben Felix: Three percent. That's a low number. If we switch from thinking about the equity risk premium to just real stock returns without adjusting for risk, what does a three percent equity risk premium look like in terms of just a real expected stock return, not a risk premium?

Elroy Dimson: I would take the view that over a 10-year period a plausible real return from bonds might be two percent. And so, if that risk premium is relative to bonds, the equity bond premium of three percent would give rise to five percent return above inflation.

Ben Felix: That's a number that I think makes sense. Is that pretty close to the historical real return on stocks?

Elroy Dimson: Well, it will leave you a lot happier than if you've been asking the same question four years ago, when the long-term return on bonds would have been zero in real terms or less moved, not all the way back to long-term history, but the sort of numbers that people could plausibly use now are not quite as discomforting as they were. This is actually the heart of what financial advisors who you're working with think about. And I think there is another way of considering what individual savers ought to be doing.

So, the traditional way would be to look at how much wealth there is and say, well, this is what you can afford to be spending over years into the future. There is another way which is to say, hypothetically at least, you could take out a contract which would cover all of your needs from 80 to 101 and let's assume that you don't expect to lift beyond that. But that's something which you could price.

It's an annuity. You could also work out how much would be needed to help you live from 99 to 100 or 98 to 99. Bill Sharpe calls this a lockbox.

It's working back from the end of your life as to how much you need, rather than something where you are now and having a plan which will take you forward. But then when you're say 82 years old, you'll have nothing left. The reason I like that is that actually focus on how you should be working for.

Some people have a job like mine which they just enjoy. With other people they would quite like to stop working. And I think the stage at which they will be able to stop working is something which they could do with guidance.

Financial advisors don't think about it that way around usually.

Ben Felix: That is a good perspective to take.

Braden Warwick: So looking at markets today with wars, high valuations and the fear of AI and so on, how should investors remain optimistic?

Elroy Dimson: Your listeners will be a range of ages because you are young, you have some young listeners who also have some people who have got quite a lot of wealth. I think part of the story is for them to know who they're investing for, what chances they can take. The optimistic ones will be ones who have the good fortune to be able to invest for their children, their grandchildren, for charities or whatever.

In the end, they'll spend their money on. And how can they be optimistic? It is through living modestly and investing for a future which stretches out a long way beyond their life if they're fortunate enough to be able to afford to invest that way.

Ben Felix: What do you think are the risks of being pessimistic about future stock returns?

Elroy Dimson: Well, if you're pessimistic, you still want to put your money somewhere. So that means that you are not like the optimist and invested in the stock market. You're going to stick your money in the bank.

Over any reasonably long period, you are likely to lose purchasing power doing that. So if this is money you don't need for the near future, then you should be investing for the long term. You still need some liquidity.

I came to New York at one stage in 1999, the peak of the TMT bubble. And at that stage, there were taxi drivers who would tell you that they are planning for their daughter's wedding or their son's bar mitzvah or whatever it was. They put some money to one side.

And within five or six years' time, they were going to be in a position to spend the money that they needed. They did not understand that the projections in growth for the long run, which the Wharton School professor Jeremy Siegel had popularized, there's still a time scale, for people who are not such optimists, they are not going to become as wealthy, but the downside is less as well. If you really need the money, then my world is also endowments.

If you look at top-scoring Cambridge colleges, some are terrifically wealthy, and others are not. If you are worried about whether rain will come through the roof and ruin the organ in your college, you don't stick the line to the stock market. If you're not likely to need it in a few years' time, that's the cross-substimate you like between long-term investors and short-term investors.

Long-term investors will do better because short-term investors can't afford losses.

Ben Felix: That was a great line.

Braden Warwick: We talked about the equity risk premium and that 3% number being fairly attractive, especially once you consider the risk-free rate and inflation. How do you think about the role of bonds in portfolios?

Elroy Dimson: The extent which bonds have moved with being a diversifier for equities is quite important in all of this. We went through a period for the first two decades of the current century in which we had become used to bonds having a role in the portfolio of being a safe asset and then 2022 came along all bets were off. I think there is a role in bonds, but I give you a personal view because our tastes, I talk personally, are fairly modest.

We don't need to spend an awful lot. There's a big benefit from being heavily invested in equities for somebody who thinks that way. People tend to ask me for advice.

I'm not a financial advisor and I don't like giving advice, but I think you need a clear idea as to how risk-averse you are, how much you might need money for an adverse event, and if you can manage it, if you can invest for the long-term, that is the second best investment you can make. The very best is investing in yourself, that's getting an education. So, they are people I rank highest, and after that, I look for long-term financial assets.

Ben Felix: I love that. Make yourself the safe asset. Live modestly so you can invest in stocks.

I love it. I share the same philosophy. Confirmation bias, that's why I'm so excited. Last two questions here. We've talked about US exceptionalism and how the US has just had this incredible performance. How do you think investors should think about expected future returns in the context of the US market?

Elroy Dimson: It's never a good idea to be a market timer. People who ask themselves, what should I be doing now? Because it looks like I could invest in risky assets now, but lose a lot and so I could stay out of the market as market timing, which is not something which any advisor would urge you to do.

The reason for that is that it's easy to make a decision now to sell your common stocks because you think they may fall, then you may never get the opportunity to buy back. What people should be doing is focusing on a long-term strategy. That long-term strategy should be as diversified as possible.

Costs should be as low as possible. There are instruments for doing that where the platform fees and the asset management fees are incredibly low. So that should be the starting point I think for many investors.

Ben Felix: Great answer.

Braden Warwick: Our last question, Elroy, how do you define success in your life?

Elroy Dimson: That's easy for me. We've got four children and four children and well, so we've got eight children and we've got 10 grandchildren and the success is happy people.

Ben Felix: That is a great answer. I've got four children too, but no children-in-law and no grandchildren yet, be a while for that still.

Elroy Dimson: But if they're happy, you're good with that.

Ben Felix: Great answer to the question. This has been a great conversation, Elroy. I mentioned to you that this is just it flew by for me.

I can't believe we've been talking for 90 minutes. Really appreciate you coming on the podcast. This has been fantastic.

Elroy Dimson: That's great. Thanks very much. It's time to sup.

Ben Felix: All right. That's it, Elroy. Thanks so much. We appreciate you spending the time with us.

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