Episode 408: Elroy Dimson – Investing & Optimism
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What is the significance of the DMS dataset in financial history?
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 Brayden Warwick, Financial Planning Product Architect at PWL Capital. Welcome to episode 408. I love the conversation that we just had, Brayden, and it's an episode that I have wanted to do for a long time. Professor Elroy Dimpson is a busy man.
Why is it essential to understand financial history for future investing?
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 Dimpson. He is a professor of finance and research director at Cambridge Judge Business School and bi-fellow of Gonville and Caius College, Cambridge. He is also emeritus professor of finance at London Business School.
What biases affect historical stock market data and returns?
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 a hundred 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. In their yearbooks, in the Global Investment Return yearbooks, they Also, and he mentioned 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.
How did the Triumph of the Optimists change our understanding of equity risk premium?
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 talked 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 US historical record, which we all know has been
Why might economic growth not lead to higher stock returns?
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'd you think of the conversation?
How does global diversification impact risk and returns?
Well, I think he 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.
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.
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Chapters
8 chapters
1
What is the significance of the DMS dataset in financial history?
0:04–0:30
2
Why is it essential to understand financial history for future investing?
0:30–1:03
3
What biases affect historical stock market data and returns?
1:03–2:24
4
How did the Triumph of the Optimists change our understanding of equity risk premium?
2:24–2:52
5
Why might economic growth not lead to higher stock returns?
2:52–3:13
6
How does global diversification impact risk and returns?
3:13–4:54
7
What is the expected equity risk premium moving forward?
4:54–7:51
8
How should investors remain optimistic in uncertain markets?
7:51–1:14:20
Speakers
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