First up, @CreditSuisse with their "Global Investment Returns Yearbook 2019"
This is the yearly update to my favorite investing book, Triumph of the Optimists
2/ You can download every yearly update for free here:
The report summarizes the long-run returns on stocks, bonds, bills, inflation and currencies in 26 global markets over the last 119 years.
6/ Here is a chart of the size of global stock markets in 1900 and today. Note, UK was the biggest at 25% (5% now), and US went from 15% to 54%!
8/ "Of the US firms listed in 1900, over 80% of their value was in industries that are today small or extinct....Even industries that initially seem similar have often altered radically. Compare telegraphy in 1900 with smartphones in 2019. Both were high-tech at the time."
13/ "US equities returned 9.4% per year, versus 4.9% on bonds, 3.7% on bills, and inflation of 2.9% per year. We should be cautious about generalizing from the USA, which, over the 20th century, rapidly emerged as the world’s foremost political, military, and economic power."
15/ Here's a chart of various countries and World. Not average real return after inflation for stocks is 5%, and bonds 1.9%.
16/ "Yield curve has historically on average been upward sloping; that is, long bonds have typically offered a higher yield to redemption than shorter dated bonds & bills.Extrapolating recent remarkably high bond returns & maturity premiums into the future would be fantasy."
17/ Couple fun Japan stats:
-futures have a long history in financial markets and, by 1730, Osaka started trading rice futures.
-From 1900-1939, Japan was the world’s second-best equity performer. But World War II was disastrous and Japanese stocks lost 96% of their real value.
18/ -Tokyo Stock Exchange, founded in 1878
- By the start of the 1990s, the Japanese equity market was the largest in the world, with a 41% weighting in the world index compared to 30% for the USA.
-Then the bubble burst. From 1990 to the start of 2019, Japan was the worst-performing stock market. At the start of 2019, its capital value is still close to one-third of its value at the beginning of the 1990s. Its weighting in the world index fell from 41% to 9%.
22/ This includes "Two markets register a total loss – Russia in 1917 and China in 1949. These countries then re-enter the world indexes after their markets reopened in the 1990s.
23/ They then turn attention to emerging markets...which have most of world GDP, population, but a fraction of market capitalization...
24/ Regarding FX (and I don't think people understand this): "changes in countries’ exchange rates vs.the US dollar have been approx equal to inflation differential w/ the US over the same period...relative purchasing power parity has held to a reasonable approximation."
29/ ..."The annualized return from a 119-year investment in EMs was 7.2% compared with 8.2% from DMs, and 8.1% from our overall World index."
30/ My summary:
Historically, stocks, bonds, and bills have returned 5%, 2%, 1% after inflation.
Counties, assets, & sectors can and have essentially gone to zero. Extrapolating the experience of any one into the future is dangerous...diversifying your bets is a prudent idea.
32/ "As of September 30, 2018, U.S. equities accounted for 55.1% of the global equity market and non-U.S. equities accounted for the remainder."
35/ "...focused on individual countries. While the US had the lowest volatility of any individual country, its volatility was slightly higher than that of the global market index. Other countries examined had volatilities that were 15% -100% greater than the global market index."
37/ "...and lower global market volatility means that investors in each market examined will likely realize diversification benefits from incremental allocations to international stocks."
39/ "...For example, while the United States may lead over some periods, another country or region will invariably lead at other points."
Again, diversify globally. Adding international stocks reduces volatility and averages outcomes.
A starting point for US investors is the global weight of 50% in US and 50% international.
(Vanguard currently recs 40% international. Bogle before passing, zero!)
48/ "...they become more global as one moves up the market-cap ladder and toward growth-oriented market segments."
49/ "...home-country bias is especially pronounced for U.S. investors. Only Australia’s S&P/ASX 200 Index rivals the United States’ S&P 500 Index for the percentage of revenue it receives from its home country, 57.9% versus 62%..."
51/ "...Those industry groups with the lowest U.S. revenue percentage tend to have a heavier weighting in growth-oriented benchmarks and funds, while those with the highest U.S. revenue percentage tend to have a heavier weighting in value-oriented benchmarks and funds."
52/ "...maps the growth and value versions of the Russell 1000, Russell Midcap, and Russell 2000 indexes to the nine grids of the Morningstar Style Box, including the percentage of each benchmark’s U.S. revenue."
56/ "If you feel like international equities in your portfolio aren’t holding up their end of the bargain, then you’re not alone. It’s one of the most common investment concerns we hear today."
Me: Over/underperformance goes through long cycles
58/ "On a company by-company basis, the picture is quite different. In fact, it may come as a surprise that the companies with the best annual returns each year have been mostly based outside of the United States."
Me: Again, increasing breadth is a good thing!
59/ "As companies have become more global, the lines between U.S. and non-U.S. indexes have started to blur, and correlations between the two have risen."
Me: Makes sense, see Morningstar thread....that's just globalization...(some may blame central banks)
60/ "If real estate is all about “location, location, location,” investing may be all about “revenue, revenue, revenue.” As the shift toward globalization continues, the address of a company’s HQ has become less important to its growth prospects than where it makes money."
61/ "The bottom line? Follow the money, not the mail."
62/ Me: People love lumping companies into countries, sectors, and regions, etc...which all have an influence. But main driver is still company specific fundamentals.
63/ "There are many reasons for lackluster non-U.S. returns over the last decade: a strong U.S. dollar, political turmoil and trade tariffs — just to name a few. But another factor is the way in which we typically measure international markets."
65/ "If you were going fishing, would you limit yourself to half the lake, or would you want to seek opportunities wherever they were available? Investing shouldn’t be any different."
66/ "outside the U.S., more companies have tended to pay dividends and have done so at higher levels. There were more than six times as many non-U.S. stocks with yields over 3%, as of August 31, 2019."
67/ "Valuations matter. There is evidence that stocks trading at a discount average higher long-term returns in future periods than those selling at a premium. But the key phrase here is long term, because there is almost no correlation between valuations and short-term returns."
77/ "The chart below shows cumulative returns above cash back to 1900 for the equity markets where we have reliable data going back over 100 years. An investor concentrated in Russia or Germany in the early 20th century would have lost most or all of their wealth,
79/ "Looking at a broader set of stock and bond markets back to 1950, you can see that an equally weighted mix has consistently performed well."
80/ "the table below looks decade by decade at how equity performance across countries stacks up."
84/ "There are plenty of instances where a given country’s equity market was decimated, and it often takes decades to recover from the losses."
85/ "Developed world investors are similarly under allocated to the rest of the emerging world and tend to have a large home country bias, leaving them geographically concentrated overall. Below, we show an example of a typical US investor portfolio’s geographic exposure."
A simple diversified equal weight can achieve nice returns with low volatility and help avoid going bust.
The US stock market has underperformed equal weighting in 8 of 12 decades.
(Let that sink in if you plan on extrapolating recent outperformance....)
87/ Ok, we may as well finish this beast...
Last paper, Rob Arnott of @RA_Insights with “Are Valuations Now Irrelevant?”
(Note: This is from a PPT so some of the text will be headlines in CAPS)
88/ "Current Equity Factor Return Forecasts: The Highest Return Potential Is Available from the Value Factor"
90/ "What Were the Sources of Historical Returns?" ie the Bogle formula
91/ "CAPE Is Powerful at Forecasting Long-Horizon Returns,but Almost Useless for Market Timing Correlation of CAPE Ratio with S&P 500 Index Real Return at 1-, 5-, 10-, and 20-Year Horizons, 1881–Oct 2017"
92/ "Other Useful Metrics Corroborate High US Valuations"
93/ "The Link Between Starting Valuations and Subsequent Returns Is Robust Across Equity Markets"
94/ "Equities: Long-Term Return Expectations"
95/ "Unconventional Assets Mostly Priced to Offer Better Returns"
97/ "•“Over-rebalance” into laggards —averaging in —as a long-term performance-enhancing strategy.
Across asset classes, higher return potential exists in international and diversifying markets
Within equities, the value factor offers the highest return potential today"
100/ It's just capitalism and its creative destruction and it's the way it should be. Nice chart from @NDR_Research that compares the S&P 500 to investing in the largest stock in the market at the time.
101/ And it's a HORRIBLE idea.
Ok, so we've hit 100 tweets so lets summarize...despite all the evidence above most people will continue to massively concentrate in their own market. That "home country bias" is a really bad idea and easily avoidable...chart via @Vanguard_Group
Diversifying globally can save your butt Investors should start with global market allocation (50% US / 50% Foreign) for full opportunity set and breadth Consider adding value tilts (This is uncomfortable for some) Relax and sleep tight
103/ That's it! For those that wanna dive in more, most of my books are free to download here:
and you can listen to my monotone on the pod here:
Have a great night!
104/ also, valuation resources for global stock markets:
105/ 6. French Fama