The World Never Ends
One thing that I have learned is that most people do not understand the stock market. It’s not very surprising because unless you are in finance, you are never taught about the stock market. Some people teach themselves by reading books, some people find someone to help them, and others just stay clear.
The people that stay clear tend to accumulate property, because property can be easily understood. We can see it, touch it and it feels safe. The stock market they often say is just one big casino – rigged!
What do I say about that?
Well, the first thing that any investor needs to understand is what it is they own. When you buy a property, you have a fairly good understanding of what you own. You know where the property is, what it looks like, how old it is, how big it is. You have probably walked around that property several times.
What do you own when you own stocks? You own businesses. In a globally diversified portfolio, you own a little bit of hundreds (or thousands) of great businesses.
Hopefully you own some big businesses, and some small businesses. Hopefully you own some US businesses and some international businesses (those in Europe, other Developed Markets and also Emerging Markets). Hopefully you own businesses in every sector (some financial companies, some technology companies, some health care companies, some industrial companies etc.). Hopefully you own some businesses that are growing fast and some that are growing more slowly.
Most people understand what it means to be a business owner. If they are not one themselves, they work for one. What many people don’t realise is that by owning stocks, you are exactly that. You are a part owner (legally) in a whole bunch of different global business. You are a shareholder. You own equity in many different companies.
What you haven’t done is walked into a casino with a bunch of casino chips.
Now, over time the value of companies (as a whole) increases, because economies grow and populations grow and people keep buying stuff. Humans also keep coming up with extraordinary new inventions and innovations which drives new companies and replaces old ones. With our rational thinking head on, we can assume that this will continue until the world ends. Again, with our rational thinking head on, we can assume that the world is not going to end anytime soon.
Unfortunately though, every little while investors get in a panic because interest rates have fallen or interest rates have risen, or inflation is too high or inflation is too low, or a President has said something, or a war has broken out, or there might be a recession, or any other number of things. And when investors get in a panic they start selling the business they own and although the value of those companies hasn’t really changed, their price suddenly does.
Humans are a bit crazy like that.
Suddenly the price of all these businesses falls. And everyone says, crikey, the world is going to end. I had better sell too. And then after a little while, everyone realises that the world hasn’t ended, and probably won’t (at least not today). So people decide it might be safe to own companies again and the price starts to go back up.
In a nutshell, company managers and owners are busy working to grow their business and increase their value, whilst the shareholders are busy doing all sorts of crazy things. Buying one day, selling the next. What that does is create volatility. Volatility is the wiggle around the long-term uptrend.
The volatility is what makes people think they own a casino chip. The volatility is what scares everyone.
But once you understand it, it’s not that scary.
And understand it you must, because (as said by Nick Murray) it’s the volatility, when properly understood, that makes long-term equity investors rich.