That’s because owning great businesses through stocks (equities) can build significant wealth over the long term. However, the attractive returns are available only to those who chose to participate and some don’t.
First, let’s look at the benefits of business ownership through stock. We’ll then get to some straight forward and practical ways for us “retail” investors.
Straight Forward Until it Gets Complicated
Unfortunately, some wait or, don’t invest at all, because the perception that investing is too risky and overcomplicated.
So, before risking hard earned money, if it is going to be risked at all, it is natural to want to know more. That’s where things get unnecessarily complicated and scare people away.
There is too much information out there to try to digest. It comes in all forms and sources including advisors paid and unpaid, publications, and the news media. Often with different and sometimes conflicting messages.
Let’s use diversification as an example.
You will quickly learn you should diversify investments to reduce risk. The suggestions may include a combination of different equities, different company sizes, geographies, corporate and/or government bonds, real estate, precious metals, commodities, and cash.
Making these type of asset choices raise more questions: How much of each to reduce risk sufficiently and maximize returns? What are the best investments within each of these asset classes? As a result, you have more to learn!
You then must decide to delay investing until you learn more, and that could take years. Alternatively, accept the risk of not knowing as much as you feel you should and plunge right in.
Or, pay someone to do it for you. So, who can you trust to do that? How do you find out if they are good advisors? How long will they be around? More research, analysis, and decisions.
Is there a better way?
Learning from the Best
A better approach is to learn from the best and forget the rest. Remember Isaac Newton’s statement; “If I have seen further it is by standing on the shoulders of Giants?”
The giants in investing, the best investors in the world, already did the hard work. They narrowed it down to a few critical principles and methods that work. We don’t have to reinvent the wheel.
Amazingly, some of the world’s best investors’ accumulated wisdom is available to us for free! They willingly share what they know.
Their outstanding track records over long periods built enormous wealth for themselves and others and it is offered to us.
Why waste precious time and money testing new investment fads and ideas? They could prove useless, or worse, lose money.
The giants of investing use principles and methods that already stood the test of time and will for years to come.
Stocks are the Best Investment
Jack Bogle is the pioneer of low-cost index funds and the founder of the pioneer and very successful Vanguard Fund with $4.5 Trillion in assets under management as of this writing.
In his book; “The Little Book of Common Sense Investing” Jack Bogle writes:
“Yet the record is clear. History, if only we would take the trouble to look at it, reveals the remarkable, if essential, linkage between the cumulative long-term returns earned by business—the annual dividend yield plus the annual rate of earnings growth—and the cumulative returns earned by the U.S. stock market. Think about that certainty for a moment. Can you see that it is simple common sense?”
Business Ownership through Stocks
Jack Bogle is referring to the fact that owning shares of a company’s stock makes you the business owner and puts you in position to earn the returns of the business.
The graph and table below compare stocks to another large asset class, bonds and illustrates Bogle’s point.
The graph shows how $100 invested in the Standard and Poor 500 stock index (S&P 500) over the past 91 years compare to $100 invested in bonds.
The bonds are the three month U.S. government treasury bills (T-Bill) and the ten year U.S. government treasury bond (10 Year T-Bond).
Each $100 invested in the S&P 500 stocks over the prior 91 years increased to $382,850 compared to $$7,309 and $2,063 respectively for 10 Year T-Bonds and Treasury Bills. Over the past 91 years stocks are the best investment by a long shot.
Don’t think you have another 91 years to invest? I get it, me neither. The point is in the long term trend is clear.
Let’s look at a shorter, but still long term, 10-year and 50-year investment horizon.
Each $100 invested in the S&P 500 stocks over the prior 50 year and 10 year periods increased to $12,000 and $220 respectively compared to $2600 and $150 for bonds (10 Year T-Bills).
The numbers speak for themselves, clearly in a wide range of years, stocks are the best investment. Would you rather end up with $12,000 or $2,600? Why would anyone choose to average down lifelong returns buying lower return asset classes?
History Doesn’t Repeat but it Rhymes
Businesses provide essential products and services for a growing population and increasing middle class around the world. These standards of living increases result in more demand for those products and services.
The businesses must grow to meet the increasing demand. and as the business grows their earnings do to. Still, the global standard of living continues to increase even at a faster pace.
That is the source of the cumulative returns earned by the stock market over the long term that Jack Bogle wants us to look at. Stocks are the best investment until global population growth and standard of living improvements change.
Warren Buffett the Chairman and CEO of Berkshire Hathaway, is considered one of the most successful investors in the world with a net worth of $84 billion at this writing. In a recent interview he expressed his views on stocks vs bonds:
“If you had to choose between buying long-term bonds or equities, I would choose equities in a minute.”
– Warren Buffett
Summary and Conclusions:
- Business ownership through stock is a great investment,
- The best investors in the world agree and willingly show us how to do it right,
- The long term record of stock and business ownership shows this to be true,
- The cumulative return of businesses accrue to the business owner; the stockholder,
- History doesn’t repeat but it rhymes; population and middle-class growth supports business growth and returns,
- Choose equities “in a minute” for long term wealth creation.
The next article “The Rational Investor” discusses how our own behavior can be our worst enemy to wealth creation.