This guest post was written by Alex Potts, the President & CEO of our partner, Loring Ward. The full title of his article is “Why Global Stock Markets May Be the Greatest Creators of Wealth We Have Ever Known.” He addresses a common theme written about in this blog – the tremendous value of owning the great companies of the United States and the world.
[highlight]I cringe whenever I hear someone say that they’re, “playing the stock market.” The stock market is not a competitive game, with winners and losers.[/highlight] Instead, it offers the potential for every investor with a globally diversified portfolio and a long-term perspective to win. Here’s why:
If you’re “playing” you’re probably doing a lot of buying and selling based on what stocks you think will underperform or outperform. But we know from history and extensive research (1) that almost no one — not even the smartest and best-educated among us — can consistently and accurately predict which stocks will be winners or losers, or when the market will go up or down.
If you’re playing the stock market, you’re thinking and worrying all the time about whether the “winners” you’ve picked are actually “winning.” Should you buy more? Should you sell?
[highlight]However, you will worry much less if you treat the stock market as a long-term investment[/highlight]. If you’re invested in thousands of companies, big and small, in many industries around the world, you don’t need to worry as much about which stocks (or even industries or countries) are “winning” or “losing” at any given moment.
So here’s how I like to think about the stock market: It’s our small piece of ownership and our unique ability to participate in the profit of companies. The implications of this thought are enormous.
Three students from the University of San Francisco started the company in 1971 as a coffee bean roaster and retailer. They sold their roasted beans successfully until 1976 when they realized that they could sell brewed coffee. By 1984, the company had six stores.
As the business became more successful, they decided to sell the business to a former employee, Howard Schultz, who had big plans to expand these profitable little shops. By 1989, Starbucks had more than 45 stores; however, to expand, he needed much more money. So Schultz decided to sell 12% of the company for $25 million dollars, and it continued to expand….
Today Starbucks has more than 20,000 locations in 61 countries. Markets are full of success stories like Starbucks in a vast array of industries. But we can’t know in advance which companies will do well and which won’t. That is why I believe you should invest as broadly as possible.
Here’s another thing to think about…
If you’re a homeowner, do you consider your home a long-term investment or do you constantly worry every time home prices drop? If you intend to stay in that home for at least 15-20 years, then you know that the short-term price of your home — up or down — isn’t that important.
Investing in the stock market is similar. If you build a portfolio that’s right for your long-term goals and you have a 10-20 year time horizon, do you need to panic and make changes every time the market drops? Not if you intend to stay invested in that portfolio for the long term.
The chart shown below is a powerful illustration of some really long-term investing. It uses the research of Dr. Jeremy Siegel, a professor at Wharton, who has studied real returns — after inflation — of U.S. indices going back to 1802.
Across wars, civil wars, incredible social and economic change and 47 recessions, depressions and financial panics, $1 invested in 1802 in American stocks (according to Siegel), was worth $706,199 in December of 2012.
returns. While no one has a life span — or an investing time span — of more than 200 years, the lesson we can all learn is that it doesn’t really matter what the markets do in the course of a year or two. If we keep a long-term perspective, and stay invested through the ups and the downs, we have the potential to earn the overall returns of the markets. Some years will be positive and some will be negative, but long-term investors don’t need to “play” the stock market to reach their most important goals.
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(1) Christopher R. Blake, Edwin J. Elton & Martin J. Gruber, University of Chicago, 1993, The Performance of Bond Mutual Funds
Michael C. Jensen, Harvard Business School, 1967, The Performance of Mutual Funds in the Period 1945-1964
James L. Davis, Dimensional Fund Advisors, 2001, Mutual Fund Performance and Manager Style, Finanical Analysts Journal
Laurent Barras, Olivier Scaillet & Russ Wermers, Robert H. Smith School, 2010, False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas
Standard & Poor’s Indices Versus Active, 2010, Standard & Poor’s Indices Versus Active Funds (SPIVA) Scorecard, Year-End 2010
Eugene F. Fama & Kenneth R. French, University of Chicago & Dartmouth College, 2010, Luck Versus Skill in the Cross Section of Mutual Fund Returns
(2) Source: Siegel, Jeremy, Future for Investors (2005), With Updates to 2012. Data is from Jan. 1, 1802 – Dec. 31, 2012. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment.
Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets) and loss of principal. Investors with time horizons of less than five years should consider minimizing or avoiding investing in common stocks.
Bonds are subject to market and interest rate risk. Bond values will decline as interest rates rise, issuer’s creditworthiness declines, and are subject to availability and changes in price.
The price of gold may be affected by global gold supply and demand, currency exchange rates and interest rates. Investors should be aware that there is no assurance that gold will maintain its long-term value in terms of purchasing power in the future.
T Bills are backed by the US government and are subject to interest rate and inflation risk. T Bill values will decline as interest rates rise. The value of the U.S. dollar depreciates over time with inflation, so the primary risk is inflation risk.