Why do I say that? Because people often think of the stock market as a roller coaster. It goes up for a while, but then goes down, eventually ending up at the same place where it began, and then the cycle starts over. The implication is that one must catch the up-cycle to make money. Or else one would just be going in circles — never accumulating any real permanent wealth.
This “going in circles” phenomenon does happen from time to time. We won’t have to look back much further than the 2007 – 2012 period. The US stock market hit a peak in late 2007 but then dived and didn’t return to its peak until about five years later.
However, stocks are ownerships in real businesses. Businesses that produce real profits. When we buy shares of a company (or a market index), we become co-owners of that business. As businesses grow, our share of the pie also grows.
A portion of national GDP is business earnings. As the country’s GDP grows, so does its corporate profits. And as shareholders in public businesses, we the investors all participate in this growth. It’s a win-win for all shareholders. One investor’s gain is not necessarily another investor’s loss.
Over the long run, the US economy will continue to grow – as it always has. You can see how the US GDP has steadily risen from this chart. As I wrote in a previous post, most of the time the US economy is expanding – interrupted occasionally by recessions. Notwithstanding these hiccups, the trajectory of growth is clear from the chart.
In the short-term, however, economy (and stocks) don’t move up in a straight line. All economies go through periods of expansions followed by inevitable recessions. Stocks follow suit. They tend to be more volatile than GDP since they are often affected by other factors – and not just GDP growth. Factors such as level of optimism (or pessimism) for future, fear, greed, global events, etc.
So, yes, sometimes the stock market will appear to be just “going in circles” – moving up and down aimlessly – for a few months or even a few years. But rest assured, eventually the stock market will move up as the country’s economy grows and businesses enjoy higher profits. We just have to be patient and ride out the near-term gyrations.
The babies being born in America today are the luckiest crop in history. American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.
Berkshire Shareholder Letter 2015
[…] — riding out market cycles patiently. I posted my thoughts on this in a previous blog entry: Stock investing is not a zero-sum game. However, Marks makes some very persuasive arguments in his book. Inspired by his words, I’ve […]