Thursday, 19 February 2009

2008 in Historical Perspective: Credit Suisse Global Investment Returns Yearbook 2009

The bible of historical equity and bond returns has just come out with the 2009 issue. The Credit Suisse Global Investment Returns Yearbook 2009 puts 2008 in long term perspective with data going back over a century. There are 20 pages of commentary by authors of the acclaimed book Triumph of the Optimists Elroy Dimson, Paul Marsh and Mike Staunton (DMS) as well as Jonathon Wilmot, chief global strategist in investment banking at Credit Suisse. Canada, the UK and the USA are among the 17 countries with one-page profiles of their performance. The 48 page document is superbly produced with colourful, insightful graphs instead of tables of numbers.

Two reasons to read this document:
  1. gain proper expectations for recovery of markets, for return levels of bonds, t-bills/cash and equities
  2. general ideas for investment winners and losers in the short to medium term in the brave new world of less debt

Quotes of note:
"We believe the basic principles remain true – that stocks still offer the best long-term returns despite their volatility – and that investors should keep faith with stocks." DMS page 5
"... even a decade is too short to judge stock returns. ... The last decade has been the lost decade." DMS
"... even in a crash, when correlations rise significantly, global diversification still makes sense." DMS
"... increased consolidation and industry concentration has in the past always been a feature of depressions or periods with a substantial overhang of excess capacity. Large firms with strong balance sheets, resilient cash flows, the ability to finance growth internally and/or continued access to credit markets are the potential winners in this process. As long ago as the 1870s, the depressed state of the economy and credit markets allowed people like Carnegie and Rockefeller to buy many smaller firms and competitors at fire sale prices, and build vast new business empires." Wilmot

Best performing equity markets from 1900 to 2008
1 - Australia at 7.9% real compounded return
2 - Sweden 7.2%
3 - South Africa 7.1%
4 - USA 6.0%
5 - Canada 5.9%
6 - UK 5.1%

It comes as a bit of a shock to read that in that lost decade of 1999 to 2008 bonds beat equities by 1.9% compounded annually for Canada, the same relationship being true globally as well. As DMS put it, equity investors "... received a savage reminder that the very nature of the risk for which they sought a reward means that events can turn out badly, even over multiple years.

DMS suggest we should expect equities to return only 3 to 3.5% more than t-bills from here on (as opposed to the 4.2% world average in the past). Later Wilmot shows a long term trend line (back to 1850) of 6.2% for US equities. There are some notable periods as long as 15 years of negative returns. So who knows, huh?

Another striking figure is DMS' estimate that the Dow Jones index has about a 50% chance of breaking through its all-time high by (start holding your breath) 2022, 13 years from now! Are your expectations getting lower like mine?

I am also considering praying for the banking system given the comments on page 23 about the effect of collapse of banking and credit in 1857 and in 1931. It seems that in the big big picture, Nortel going under doesn't matter, nor will GM and Chrysler (as they surely eventually will) but much as many hate them, if the US/UK/Canadian/Japanese/European banks start to go down en masse, we will be in for a much worse time than we are now experiencing.

Hat tip to Mebane Faber's World Beta blog where I found the mention and link to the document.


Anonymous said...

What a great gem! Thanks for posting this. Triumph of the Optimists is one of my favourite books.

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Jordan said...

This looks like a great report and I intend to read it all shortly.

I just had one quick thought after reading the book "The Black Swan" I'm starting to really question if it even makes sense to care about predictions for the future of the stock market? It seems like no one even comes close to accurately predicting it. I have a feeling the long term historic nature of this report will be better then most short term calls.

How would we all feel to just admit we have absolutely no clue what will happen, that no one does or ever will, and to just invest accordingly?

CanadianInvestor said...

Jordan, the more I read stuff like this report, the more I extend the meaning of "long term" - it seems 10 years isn't enough to rely on the stock market to do its 6% real return average. One needs to think 20 years or longer. Shorter than that, who knows and that's where real diversification comes in - you won't do as well for sure as "equities-only" but then you won't feel poor or actually be poor if you need to withdraw before the 20 years are up.

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