September 24, 2019

Newsworthy: I couldn’t help but hear…

Author: Marty Moore, CFP®

 

I couldn’t help but hear…

On days that I don’t have a meeting scheduled I often walk across the street to have lunch at Reid’s grocery.  Its seating area is small and usually quiet; a good place to have lunch and catch up on some reading.

One day recently it wasn’t so quiet.  A conversation was taking place next to me that I couldn’t help but overhear.  It went something like this.

Diner 1 (mid 40’ish guy eating a salad): “I don’t get the stock market.  I don’t understand it and it scares the %#!& out of me.”

Diner 2 (probably a little older chomping on a turkey sandwich): “I’m with you.  I’ve been putting money in my 401k for over 20 years and I’m still not sure what I’m doing.  I guess I’ve done ok but I really don’t know.”

Later in the conversation.

Diner 1: “Hopefully North Carolina will legalize sports gambling soon. THAT’S something I know about.  I can make money doing that.”

I felt a bit guilty about listening in on their conversation but I couldn’t help myself, especially since the volume of their voices told me, and others around them, they weren’t too worried about being overheard.

Their conversation got me to thinking about an article I read recently by Ben Carlson (full article: Explaining the Stock Market to Big Cat, https://awealthofcommonsense.com/2019/09/explaining-the-stock-market-to-big-cat/)

Here are a few excerpts from that article that might address the concerns and the lack of investing knowledge of my inadvertent lunch partners.

In regards to: “I don’t get the stock market.”

The stock market allows you to earn a share of the corporate world. Short of owning your own business, buying shares in the stock market is the simplest way to own a slice of the business world.

Buying shares in the stock market makes you a part-owner in those companies, entitling you to a share of their profits, shareholder payouts, and growth.

Let’s say you had the ability to invest in every professional athlete in the major pro sports. Each year you would get a share of their earnings, along with the growth potential for higher contracts in the future.

There would be busts, flameouts, and injuries along the way. For every Peyton Manning and Tom Brady, there’s a Ryan Leaf. But the overall trend would be higher and your piece of the collective earnings of these players would grow over time, along with any appreciation in their brand.

For: “I guess I’ve done ok…”

The stock market is a compounding machine. Since 1950, the largest companies in the U.S. stock market (the S&P 500) have seen dividends (actual cash flows) paid out per share grow from roughly $1 to $56. Profits (earnings per share) have grown from roughly $2 to $135. That’s a growth rate of 4777% and 5712%, respectively, over the past 70 years or so, good enough for a 6% annual growth rate.

One dollar invested in the U.S. stock market in 1950 would be worth more than $1,700 by the end of August of this year.

For: “… it (the stock market) scares the %#!& out of me.”

There is another side to this long-term compounding machine. Stocks can rip your face off over the short-term.

If there is an ironclad rule in the world of investing, it’s that risk and reward are always and forever attached at the hip. You can’t expect to earn outsized gains if you don’t expose yourself to the possibility of outsized losses.

The reason that stocks earn higher returns than bonds or cash over time is because there will be periods of excruciating losses in stocks.

That $1 invested in 1950 would grow to $17 by the end of 1972 and subsequently drop to $10 by fall of 1974. From there it would grow to $95 by the fall of 1987, only to drop to $62 over the course of a single week because of the Black Monday crash.

That $62 would have turned into an unbelievable $604 by spring of 2000. By fall 2002 that $604 would have been down to just $340. After slowly working its way all the way to $708 by the fall of 2007, over the next year-and-a-half it would be cut in half down to $347 by March 2009.

By the end of December 2009 that initial $1 was worth $537, which is less than the $590 it was worth a decade earlier by the end of 1999.

So $1 growing turning into $1,700 sounds amazing until you realize the fluctuations it took to get there. The stock market goes up a lot over the long-term because sometimes it can go down by a lot over the short-term.

Patrick Mahomes occasionally throws interceptions with his deep balls and no-look passes, but it’s worth the risk for the number of TDs he throws.

I would have also liked to have passed this part of the article along to them.

The stock market is a bet on the futureStocks can be thought of as a way to ride the coattails of intelligent people and businesses as they continue to innovate, grow, and create value.

It has never paid to bet against human ingenuity. Stocks are a way to own a piece of the profits, dividends, innovation, collective wisdom, growth and future cash flows of the corporate world.

I don’t know what’s going to happen to the future of the pro sports leagues. The NBA is on the rise (FANG stocks?), the NFL seems to be plateauing or at least slowing down (blue chips?) while Major League Baseball may be in a state of decline in terms of popularity (European stocks?).

But I wouldn’t bet against the collective ability of these leagues to generate revenue, appreciation, and profits going forward, much like the stock market.

Maybe, just maybe, Ben Carlson’s explanation of the stock market would have at least helped the health conscious salad eater realize that he is probably better off growing his money via his company’s retirement plan than trying to bet whether the Panthers will beat the Texans on Sunday.

From finance columnist Jonathan Clements:

“The financial markets have two primary functions: to make us wealthy over time and drive us batty along the way.” 

Words of wisdom

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As always, thanks for reading.

Marty

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