Time and Markets

It has been said that most people should not be so concerned about market timing as they are about time in the market.

The reason is that for most people the best way they have to participate in the economy and the innovation that accompanies it is to be invested in the stock market.

Most people will never own their own business. They will never invent anything. They will never come upon a great idea that will capture the imagination of the masses.

These are the typical pathways to wealth. For some these paths have led to enormous fortunes. Andrew Carnegie. Henry Ford. Sam Walton. Bill Gates. Steve Jobs. Jeff Bezos.

Most people will labor every day and be paid for that labor. However, their are finite limits to the amount of money anyone can earn from their own labor. 

Why is it difficult to become wealthy simply by your own labor and talents?

It is a question of time. We all only have so many hours in the day. We may be very productive but time is a finite resource. It is a limiting factor in utilizing our labor.

The amount that any one person is willing to pay another for their labor is also limited. For these reasons, it is hard to grow rich simply by your own individual labor.

Entertainers and professional athletes are exceptions to this rule. They are able to showcase their talents and labor to a broad audience and are able to get many, many people to pay them for it in the form of ticket prices or a media audience. However, each member of that audience is paying just a small price that gets leveraged with the size of the audience.

Inventors and authors are similarly advantaged. An invention that is used by millions of people or a best selling book creates large royalty payments that allow them to leverage their sole labor effort.

Entrepreneurship is the most common path to wealth because owners can leverage their time by getting other people to work for them thereby gaining a portion of others' labor for their own benefit. Starting a business is the path that entrepreneurs follow to gain this advantage.

If you are not following one of these paths, your only option to become wealthy is to  work, save and invest. You leverage that savings  by getting your savings working for you through compound returns. As your money begins to work for you the need for you to labor to support yourself is reduced. If you can get enough money saved and invested you eventually do not have to labor at all. Your money does all the work to support your lifestyle.

That is why time in the stock market is so important for most people. You may not own a business, or invent or innovate anything, but you can effectively partner with people who do. If you are widely invested in the stock market you can participate in the growth of the economy as a whole. 

The U.S stock market has been a particularly good place to have your money invested over the last 10 years.

Here is a chart that shows the performance of the S&P 500 for the last decade. It has advanced from 912 to 2887 over the last 10 years. Looked at in simpler terms, if you had $1,000 invested in the stock market on this date in 2009 you would have $3,166 today.

Source: BarChart.com

Of course, the stock market does not alway go up. You only need to recall what happened at the end of last year to know that. That retrenchment is very evident looking at the chart above.

However, if you believe that the United States (or another country, region or the world) is going to continue to be a place where humans will continue to be more productive, more innovative and more inventive over time you can participate in that growth by being investing in the stock market.

I came across some interesting charts recently that puts the long-term performance of the stock market in perspective. These charts were put together by The Visual Capitalist based on data from The Measure of a Plan.

It shows U.S. Stock Market annualized returns from 1872 to 2018 for 1/5/10/20 year rolling periods. Bear in mind these are "real" returns and have been adjusted for inflation

Notice that there is not one 20-year period in 146 years of stock market data where there was a negative return. The average real return was 6.7%. That would be about 10% in nominal terms.

Credit: The Virtual Capitalist

However, looking at all 145 one-year periods, the stock market has produced a loss 31% of the time. 

Here is a chart showing the distribution of those one-year returns. 

Credit: The Measure of a Plan

The largest one-year loss has been 37%. The largest one-year gain was 53.2%.

All of this should show you why the famous investor Benjamin Graham once said this about the stock market.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

What did Graham mean by that?

Stock market prices are driven by expectations, emotion, investor psychology and sentiment in the short run. Look no further than stock prices day to day. In almost all cases there is nothing substantive that has changed with a company from one day to the next. Or even one minute to the next. However, the stock price of that company is changing all the time based on investor perceptions. That is a voting machine.

However, in the long run, all of that emotion, psychology and perception gets subtracted. What is left is the real economic value of the company or of the entire market. That is a weighing machine.

Weigh all of this as you think about your financial future.

Weigh all of this as you vote as well.

Wealth follows private sector business ownership, invention and innovation. The individual incentives and rewards of a capitalist society is what creates wealth and lifts a society up.

Socialist ideals sound great in theory. However, history has shown that the theory has never held up when it comes into contact with the real world and the humans that populate it.

If you doubt it, you might want to take a look at stock market returns in Venezuela since the people of that country took the turn towards socialism. A decision that most have now come to regret.

The Venezuelan stock market was down 94% in dollar terms in 2018.

Choose wisely in everything you do.