#100 - Elroy Dimson - “High Valuations Don't Necessarily Mean That We're Going to See Asset Prices Collapse"

54 minutes

To celebrate the milestone of reaching 100 episodes, we’re thrilled to welcome Professor Elroy Dimson, author of Meb’s favorite investing book of all time, Triumph of the Optimists.

Per Meb’s request, Elroy starts by giving us a summation of his research history which led to Triumph of the Optimists. He had a heritage in producing indexes and began reaching out to researchers across the globe in hopes of accessing different data sets. Looking at all the aggregated data, it became clear that from a long-term perspective, people who had invested in risky securities at the beginning of the century had done very well. People who had bought bonds and T-bills had not performed as well. The optimists had triumphed.

Next, Meb brings up a quote from Elroy about a controversial finding regarding the lack of correlation between economic growth and stock market performance. If anything, the relationship was reverse. Elroy expounds upon this, telling us that if it’s obvious that a market is growing, that’s public information. You can’t trade that since everyone else knows too. So, if you investing in countries where GDP has been growing, that could mean you’re too late.

Meb steers the conversation toward valuation, market cap weightings, and home country bias. Elroy walks us through the market cap concept, touching on the historical Austrian empire as well as the Japanese bubble. This leads to a lesson in finance, which includes real yields today, the Gordon Model, the multiple people are willing to pay today (which is higher), and the takeaway that “high valuations don’t necessarily mean that we’re going to see asset prices collapse” – they’re a reflection of the low interest rates we have today.

Meb asks about bonds, and whether Elroy has seen another historical period of negative yielding sovereigns. When you look at real rates, how does it play out for future returns?

Elroy tells us that real (inflation adjusted) rates are better to consider than nominal rates. And it turns out, real rates have been lower. Negative real rates are not all that rare – what is rare is so many countries experiencing them at the same time. This dovetails into a conversation about inflation and currency hedging. Elroy provides some color on currency issues but notes that hedging is not required if you’re a long-term investor.

There’s plenty more in this centennial episode: factors… growth stocks versus value stocks… historical returns of housing… even stamps, musical instruments and the investment returns of a good Bordeaux.

How does it compare to that of equities? Find out in Episode 100.

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