Stock markets are where entities in need of capital meet with others seeking to grow wealth by investing their capital to fund and participate in the success of business ventures.
Investors exchange cash for shares of stock, entitling them to a portion of what they hope will be future profits, including dividends and growth in the firm’s value.
Capital markets have been around in one form or another since the days of the Roman Empire. They help economies grow by facilitating what can be a virtuous cycle – building businesses that provide desirable goods and services while producing profits for owners (including stockholders).
Triumph of the Optimists
In The Triumph of the Optimists (one of my all-time favorite books), Elroy Dimson, Paul Marsh, and Mike Staunton document the history of global stock markets from 1900 through 2000. Published on the heels of the dot.com stock market crash, Y2K scare and 9/11 terrorist attacks, I wouldn’t have been surprised if these academics hedged on future market prospects. But their 101-yearlong, data-driven story of global stocks and bonds is one of long-term success, though also one of dramatic volatility during particular time periods and within individual countries.
Their overall conclusion is summarized in the book’s preface: “The risk-takers who optimistically invested in equities were the group who triumphed over the long term.”
Will optimistic stock market investors continue to triumph?
As every investor should know, past performance is no guarantee of future results. However, interestingly and optimistically, in the nearly 24 years since the publication of their book, the annual equity risk premium for global stocks, or the reward you get for investing in stocks over the risk-free rate, has averaged 5.76 percent, slightly more than the historical premium of 4.9 percent calculated by the authors across their 101-year data series.
Forecasting what will happen in global stock markets over the next month or even the next five years is a low probability pursuit. But, for long-term investors holding diversified portfolios, those “optimistic risk takers” who choose to look out over the next ten to twenty years, there continues to be very good evidence that their view of stock markets should be one of educated optimism!
