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RP: It’s often assumed that to be a successful investor, you need to be an expert in economics.
In fact, far more useful is a knowledge of history — particularly the history of the financial markets.
Professor Russell Napier runs a financial history library in Edinburgh called The Library of Mistakes.
For him, there’s one standout lesson that financial history teaches us.
RN: People sometimes ask me: ‘What is the number one book to read on finance?’ and it’s a book by Elroy Dimson, and Marsh and Staunton called Triumph of the Optimists. All that book is — it’s a rather expensive book, we have a copy here for anyone who wants to come and read it — is a roadmap of the historical returns from equities, bonds, and cash over a very prolonged period of time; and it allows you to work out what has been a reasonable return and an unreasonable return.
In other words, what you can expect from a market and what you can’t expect from a market. I think the simple answer from that, all that data, is that you do need to diversify; and not just between equity markets but between asset classes.
RP: That book, Triumph of the Optimists, charts financial returns over the entire twentieth century.
No one invests quite that long, but new investors today may be investing for at least 50 years.
You need to take a long-term view.
RN: All investors need to know what the long-term is. That’s it. That’s what they need to know. Once they know what the long-term is, then they can adjust accordingly. The long-term, I think, is eighteen years. I think, on the whole, for US equities, there’s never been a period of eighteen years when you didn’t get a positive real return with dividends re-invested.
The problem is that most people when you say long-term, think four or five. Some might even stretch to eight or nine, but there have been these very prolonged periods when equities have not delivered your positive real returns.
RP: All investing involves a degree of risk. But if you diversify and think long term, you can afford to invest with confidence.
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