Morningstar - Q3 2020 - 37

At the opposite end, the country with the lowest
return, Austria, had the highest volatility. (AustroHungarian returns are linked to post-World
War I Austrian returns to form a single series.)
So, if you were lucky enough to invest in a country
with a high rate of return, you got the bonus
of a less volatile market. In other words,
survivorship bias is not only about performance;
it is also about volatility.
The volatility of Germany was extreme. Given
Germany's history of losing two world wars,
going through hyperinflation and a depression,
and being occupied, perhaps this should
come as no surprise. The extreme annual real
returns in local currency are negative 90.8%
in 1948 and positive 154.6% in 1949. In U.S.
dollars, the extremes are negative 79.7% in 1945
and positive 717% in 1949.7 To see the impact
of such extreme volatility on the accumulation
of wealth, we plot the growth of the real
value of one unit of currency invested at the end
of 1899 over the 120-year period ended in
2019 in E X H IB IT 4 .
The Anthropic Principle
Survivorship and sample-of-one biases are
actually an application of the anthropic principle in
philosophy, which says that the world looks as it
does because if it didn't, the conditions for our
existence would not have been met and we would
not be here to observe it. Thus, for example,
there is a certain set of cosmological constants
that govern how our universe operates. Our
existence depends on these constants having the
values that they do. There could be, or could
have been, other universes in which the constants
have other values, and therefore, we could not
exist in them. So, why do we live in a universe in
which the cosmological constants are right
for us? It is because they have to be right for us, or
we would not be here to observe the constants
and ask this question.

The same principle applies on a less-thancosmological scale. If apes in the Pleistocene

The Right Time

End-1899

Start-2020

60%

increased real income per head by double or even
triple, 100 or 200 percent or so, only for it to fall
back to the miserable $3 a day typical of humans
since the caves. But the Great Enrichment increased
40
real income per head, in the face of a rise in the
number of heads by a factor of seven-by anything
from 2,500 to 5,000 percent." 1

The period over which we measure country-specific
54.5
real equity market returns is unique in human
history. The economist Deirdre McCloskey calls it
"the Great Enrichment." She writes:
"The upshot of the new ideas has been a gigantic
improvement since 1848 for the poor, such as many of
25.0
your ancestors and
mine, and a promise, now being
fulfilled in China and India, of the same result
15.0worldwide. It is a Great Enrichment for the poorest
11.5
among us. Earlier prosperities had intermittently
3.2

20
Relying on data from such a unique period of history
is a form of bias.
13.0

5.1

U.S.

France

U.K.

2.6

Germany

3.5

2.2

Australia

1 McCloskey, D. 2017. "The Great Enrichment Was Built on Ideas, Not Capital." Foundation for Economic Education,
Nov. 22, 2017. https://fee.org/articles/the-great-enrichment-was-built-on-ideas-not-capital/.

189

EXHIBIT 3

A Twist on Volatility If you were lucky enough to invest in a winning country,
you got the bonus of less volatility.
Real Return vs. Standard Deviation on Equity Markets, in Local Currency, 1900-2019

Compound Annual Return
8%
Australia

United States

New Zealand
Canada

South Africa

U.K.

Sweden
Denmark
Netherlands

Switzerland

Ireland
Spain

Finland
Norway
Japan

Portugal
Germany

France
Belgium
Italy

2
Austria

0
15%
20
Standard Deviation

Sources: Dimson, Marsh, and Staunton (op. cit.), Morningstar Direct. Data as 12/31/2019.

7 The 1945-49 returns for Germany are somewhat speculative because of the chaotic currency situation that prevailed at the time. The old currency, the reichsmark, was exchanged for the new
currency, the deutschemark, at rates ranging from 1:1 to 10:1. This very wide range makes it impossible to settle on a single and unambiguously correct method of currency translation
from deutschemarks to U.S. dollars over that period. It also affects local currency returns because the returns were delivered in two different local currencies, the exchange rate between
which varied depending on who held the currency and when. We treat the returns converted by DMS at 1:1 as correct for the purpose of this analysis.

morningstar.com/lp/magazine

https://www.fee.org/articles/the-great-enrichment-was-built-on-ideas-not-capital/ http://www.morningstar.com/lp/magazine

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