Why We Hate The Stock Market, And Why It Is So Necessary
Every now and then we encounter a potential client who wants to open an investment account but doesn’t want to put money into the stock market. “It’s just a giant casino”, they might say, “no different than gambling, and too risky for me”. It is not surprising that many people feel that way about financial markets. The stories we read in the press or increasingly, online, are about fortunes made and lost, violent price movements and companies that rise like skyrockets, before swiftly plunging back to earth. Sensational events sell newspapers and capture eyeballs; nobody spends much time reading or talking about companies that just calmly go about their business, making money for their shareholders. These kinds of companies make up the vast majority of the firms listed on stock markets; they just don’t get as much attention.
Markets have the ability to drive us all a little bit crazy. Those of us in the profession of wealth management have no choice but to pay attention to the markets all day every day; that’s what we get paid for (in part). Those who have money invested in the markets sometimes fall into that trap and spend far too much of their time watching numbers on screens, as if paying obsessive attention will somehow make “their” stocks go up. With all their faults (and there are many), stock markets are absolutely essential, and they remain the best way for the average person to invest.
A little over 500 years ago a group of merchants in what is now the Netherlands decided it would be smart to build some ships, send them around the world to the “spice islands” in what is now Indonesia, and bring back products such as nutmeg, mace, cloves, and pepper. These exotic goods typically sold for as much as 15 times their cost when landed in Northern Europe, and a single successful voyage could show a profit of as much as 400%. But there were significant risks. Ships could sink, and did. Pirates were a real hazard, as were the trading companies of other countries, particularly the Portuguese. The Dutch East India Company (as it is known in English) became the world’s first joint stock company in 1602. By forming the company, the merchants achieved three very important goals:
- They were able to assemble a significant amount of capital, enough to build lots of ships, employ hundreds of sailors, and pay for the establishment of fortified ports in south Asia. No single person was rich enough to do that alone.
- They were able to spread risk. By launching more than one ship, the chance that all their capital would be lost in one catastrophe was eliminated. They also reduced the risk for each individual by making small investments possible. This made the investment of each shareholder much less risky.
- They provided a source of liquidity. No longer would an investor have to wait for his ship to come in. Shares of the company could be traded amongst investors, allowing them to come and go according to their own needs.
The Dutch East India Company was enormously successful and contributed greatly to the Golden Age of the Netherlands which we see so richly portrayed in the paintings of the Old Masters. While the company eventually failed, its more important legacy is the system of stock markets that are now established around the world.
So back to the start of the story and our reluctant investor. Focusing on day-to-day trading activity can make the market seem like a casino, and there is no question that there are lots of market participants who are involved in a form of gambling. They might be momentum traders who don’t really care what a company does – they are focused only on the movement of the stock price, sometimes from second to second. They might be sophisticated investors who rely on complex quantitative strategies that involve buying and selling a variety of different kinds of securities. But the fact is, for the long-term investor, none of that really matters. The stock markets still do what they were designed to do when invented five hundred years ago.
During the last twenty or so years we have witnessed the creation and growth of some of the most amazing companies the world has ever seen, each a creator of wealth on the scale of the Dutch East India Company. Apple, Microsoft, Amazon, and others have enabled the average investor to take part in that wealth creation, and still do today. Moreover, each of us can do so with the assurance of liquidity every business day of the year, with minimal transaction costs, and in an amount that does not represent undue risk, depending on our individual circumstances.
Stock markets are indispensable. They are the fundamental engine of modern capitalism, and importantly, they democratize and decentralize wealth formation and accumulation. When we consider the investments by pension plans and government insurance schemes, we realize that almost every citizen in the developed world is a stock market investor, directly or indirectly; and all are better off as a result.
Higher Rates are here and may be here to stay. What to do about it. – Benjamin Klein – October 3, 2023
Barry Schwartz on BNN Bloomberg’s The Street: Higher rates don’t mean that stock valuations must come down – October 5, 2023
Barry Schwartz on BNN Bloomberg’s The Street: We’re seeing “nightmare on yield street” at this moment – October 5, 2023
Long Term Investing Podcast with Barry Schwartz
Episode 25 – October 2, 2023
Episode 26 – October 12, 2023
Episode 27 – October 23, 2023
Ernest Opinion by Ernest Wong
What to do when a stock doesn’t work – October 4th, 2023
How much did Taylor Swift earn from The Eras Tour? – Bloomberg
Confessions of a work-from-homer – Tim Harford