In 1988, Charles Givens published a bestseller called Wealth Without Risk: How to Develop a Personal Fortune Without Going Out on a Limb.
I can only assume it was about inheritance, because there is no other way of getting wealthy without taking risk.
(Even the Mega Millions lottery – one of the world’s worst bets with 300 million-to-1 odds – requires that you risk two bucks.)
Successful investment is about the intelligent management of risk. You can’t avoid risk or eliminate it. You have to take it by the horns and deal with it.
Every investment choice entails risk.
Even if you keep all your money in cash investments like T-bills and certificates of deposit – not a terribly good idea, incidentally – you are taking the sizable risk that your purchasing power will fail to keep pace with inflation.
Yet, terrified of seeing the value of their investments decline even temporarily, millions of investors do exactly this.
That’s understandable at first blush.
After all, it’s not easy watching your nest egg get scrambled as the stock market spasms in reaction to every piece of bad business news or new government statistic.
Over the long haul, however, extreme safety comes at a steep price.
Investors who take an ultra-conservative approach are exposed to a high degree of shortfall risk. (The risk that you will run out of money before you run out of heartbeats.)
Many potential investors view the market as a giant casino. But, over the long term, nothing could be further from the truth.
Historically, the odds of making money in the U.S. stock market are 50% in one-day periods, 68% in one-year periods, 88% in 10-year periods and 100% in 20-year periods.
Stocks are not simply slips of paper with corporate names on them. A share of stock is a fractional interest in a business.
And over the long haul there is one thing about equities that you can take to the bank: Share prices follow earnings.
Look back through history and you will not find even a single company that increased its earnings quarter after quarter, year after year, and the stock didn’t tag along.
Conversely, try to uncover one whose earnings declined year after year and the stock continued to move up. It just doesn’t happen.
That’s why Benjamin Graham famously said of the stock market, “In the short run it’s a voting machine, but in the long run it’s a weighing machine.”
And what it weighs is earnings.
Regardless of what the market does next week or next month, you can count on it to reflect corporate profits over the long term.
When results are measured not in months or years but decades, nothing has rewarded investors better than common stocks.
They are the greatest wealth creator of all time.
Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania and author of Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, has done a thorough historical study of the returns of different assets over the past couple hundred years.
What he discovered (extended through 2019 by our Oxford Club research team) is dramatic: $1 invested in gold in 1802 would have been worth $75 at the end of 2019. The same dollar invested in T-bills would have grown to $4,430. A $1 investment in bonds with interest reinvested would have been worth $34,198. And $1 invested in common stocks with dividends reinvested – drumroll, please – would have been worth $29.7 million.
The odds are good, of course, that you weren’t around a couple hundred years ago.
And, unless something truly exciting happens in the field of cryogenics, you won’t be around 200 years from now either.
However, it’s not necessary to think that long term.
Pick whatever starting date you want over the past two centuries and you’ll find that – when measured in decades – the investment returns for different asset classes are remarkably consistent.
And stocks are the big winner. Since 1926, the stock market has generated a positive return in 70 out of 95 years.
This is shaping up to be another good year for the market. Yet some insist on calling it a bubble.
It may look like one when you consider that the S&P 500 now trades at 31 times trailing earnings, a level unseen since the dot-com era.
But here’s the major difference: Earnings over the last year are greatly depressed due to the pandemic.
Second quarter results have been nothing short of terrific. Analysts expected corporate earnings to grow 78%. But average earnings are up 93% from a year ago.
The broad market is currently trading at approximately 21 times prospective earnings for the next 12 months.
That is in line with the average over the last 30 years. Yet over the last three decades, interest rates have rarely been so low.
That makes it cheaper for consumers, businesses and governments to borrow. It also means that there aren’t good investment alternatives in the fixed-income market.
This isn’t to say that stocks can’t suddenly sell off.
That’s always a possibility, one you should prepare for in advance with diversification outside of equities and trailing stops behind your individual stock positions.
But a diversified portfolio of stocks has been the best investment choice for well over 200 years. And it is likely to remain so for the foreseeable future.