The Number 1 Lesson from Market History

 

VIDEO TRANSCRIPT:

Robin Powell – Financial Journalist Professor Russell Napier – Financial Historian

RP: It’s often assumed that to be a successful investor, you need to be an expert in
economics.
In fact, far more useful is a knowledge of history — particularly the history of the financial
markets.
Professor Russell Napier runs a financial history library in Edinburgh called The Library of
Mistakes.
For him, there’s one standout lesson that financial history teaches us.
RN: People sometimes ask me: ‘What is the number one book to read on finance?’ and it’s
a book by Elroy Dimson, and Marsh and Staunton called Triumph of the Optimists. All that
book is — it’s a rather expensive book, we have a copy here for anyone who wants to
come and read it — is a roadmap of the historical returns from equities, bonds, and cash
over a very prolonged period of time; and it allows you to work out what has been a
reasonable return and an unreasonable return.
In other words, what you can expect from a market and what you can’t expect from a
market. And I think the simple answer from that, all of that data, is that you do need to
diversify; and not just between equity markets but between asset classes.
RP: That book, Triumph of the Optimists, charts financial returns over the entire twentieth
century.
No one invests for quite that long, but new investors today could be investing for at least
50 years.
You need to take a long-term view.
RN: All investors need to know what the long-term is. That’s it. That’s what they need to
know. Once they know what the long-term is, then they can adjust accordingly. The longterm,
I think, is eighteen years. I think, on the whole, for US equities, there’s never been a
period of eighteen years when you didn’t get a positive real return with dividends reinvested.
The problem is, I think, is that, most people, when you say long-tern, think four or five.
Some might even stretch to eight or nine, but there have been these very prolonged
periods when equities have not delivered your positive real returns.
RP: All investing involves a degree of risk. But if you diversify and you take a long-term
view, you can afford to invest with confidence.