Episode summary
Elroy Dimson: Investing & Optimism | Rational Reminder 408
The Rational Reminder Podcast
· · Hosts: Benjamin Felix, Braden Warwick · Guests: Elroy Dimson
Summary
Elroy Dimson argues that the only sensible way to think about future returns is to study long-run financial history, because markets are shaped by survivorship bias, missing data, and the tendency to remember only the countries that did well. He explains how the DMS dataset and Triumph of the Optimists were built by stitching together commercial records, academic work, and local histories across countries, with a common start date around 1900 to reduce distortions from wars and other disruptions.
A major theme is that economic growth is not the same thing as stock-market performance. Dimson says investors often pay up for countries and industries with strong growth, so much of the growth is already reflected in prices. That helps explain why emerging markets and fast-growing sectors have not always delivered superior long-run returns. He also notes that railways were once the dominant industry and, despite dramatic declines in market share, delivered surprisingly strong long-term returns.
Dimson is cautious on the equity risk premium, suggesting something closer to 3% to 4% over safe assets than the much higher figures many institutions still use. He also emphasizes that diversification matters, but that country and factor tilts should be understood as risk exposures, not free lunches. In his view, international diversification reduces risk, while home bias, factor exposures, and the persistence of value or size premiums all depend heavily on costs, behavior, and the changing structure of markets.
Key takeaways
- Dimson says global return histories must correct for survivorship bias, wartime disruptions, and other data distortions before they can inform expected returns.
- He argues that strong economic growth does not automatically produce higher stock returns because growth is often priced in advance.
- He puts the long-run equity risk premium at roughly 3% to 4% over safe assets, below what many endowments still assume.
- Dimson says international diversification still reduces risk, even if the benefits are smaller and harder to capture than in the past.
- He warns that factor exposures like size, value, and momentum can be intentional or accidental, but they are always real bets.
- He notes that railways were a dominant industry in 1900 and still delivered surprisingly strong long-run returns despite huge declines in market weight.
Notable quotes
“It's extremely difficult to think about the future without knowing where you've come from”
“So our data change the way people think about the reward for risky investment for the equity risk premium”
“a lot of that could be diversified away”
“I would take the view that over a 10-year period, a plausible real return from bonds might be 2%”
How the episode opens
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. All right, welcome to episode 48.
Uh, this is an episode that I am, man. I I loved it. I love the conversation that we just had, Braden, and it's an episode that I have wanted to do for a long time, but Professor Elroy Dimpson is uh he's a busy man.
Uh but I I I was I was on another podcast uh in the UK and that person uh Damian is the Damian talks money podcast had a has a relationship with Elroy and so he made an introduction uh which which uh finally got the got the connection made. Uh and yeah so but it we we would have done this one sooner if we could have. Uh I guess is the point of my long preamble.
But I'm super excited that we got to talk to uh Elroy Dempson. He is a professor of finance and research director at Cambridge Judge Business School and by fellow of Goneville and Kais College Cambridge. He is also Emiritus professor of finance at London Business School.
Uh listeners will likely know his name. He's Alroy Dimpson, uh, 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, um, something like uh, lessons from a 100 years of stock returns or something where we went through a bunch of their past reports.
they they do uh something called the the global investment returns yearbook uh that they've been publishing for many many years now.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- financial history
- equity risk premium
- global diversification
- factor investing
- expected returns
Companies and tickers mentioned
- PWL Capital
Watch the episode
Watch “Elroy Dimson: Investing & Optimism | Rational Reminder 408” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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The Rational Reminder Podcast, this episode and its artwork belong to Benjamin Felix, Cameron Passmore, and Dan Bortolotti. Octagon is not affiliated with the show; this page is an independent summary.
