uity return occurred in a period marked by very low real returns on
bonds. Since firms finance a large part of their capital investment with
bonds, the low cost of obtaining such funds increased returns to share-
holders. The period of the 1930s and 1940s marked an extremely under-
valued period for equities and overvalued period for government
bonds, leading to unusually high returns for stocks and low returns for
bonds. As stocks and bonds become more correctly priced, the equity
premium will certainly shrink. Chapter 8 will further discuss the equity
premium and its implications for future returns.
WORLDWIDE EQUITY AND BOND RETURNS:
GLOBAL STOCKS FOR THE LONG RUN
When I published Stocks for the Long Runin 1994, some economists ques-
tioned whether my conclusions, drawn from data from the United
States, might overstate equity returns measured on a worldwide basis.
Several economists emphasized the existence of a survivorship bias
in international returns, a bias caused by the fact that long-term returns
are intensively studied in successful equity markets, such as the United
States, but ignored in countries, such as Russia or Argentina, where
stocks have faltered or disappeared outright.^17 This bias suggested that
stock returns in the United States, a country that over the last 200 years
has been transformed from a small British colony into the world’s great-
est economic power, are unique and historical equity returns in other
countries would be lower.
Three U.K. economists subsequently examined the historical stock
and bond returns from 16 countries over the past century and put to bed
concerns about survivorship bias. Elroy Dimson and Paul Marsh, pro-
fessors at the London Business School, and Mike Staunton, director of
the London Share Price Database, published their research in a book en-
titledTriumph of the Optimists: 101 Years of Global Investment Returns. This
book provides a rigorous yet readable account of worldwide financial
market returns in 16 separate countries.
Despite the major disasters visited on many of these countries, such
as war, hyperinflation, and depressions, all 16 countries offered substan-
tially positive, after-inflation stock returns. Furthermore, fixed-income
returns in countries that experienced major wartime dislocations, such
as Italy, Germany, and Japan, were decidedly negative, so that the supe-
18 PART 1 The Verdict of History
(^17) See Stephen J. Brown, William N. Goetzmann, and Stephen A. Ross, “Survival,” Journal of Finance,
vol. 50 (1995), p. 853–873.