Innovation and growth keep powering the global economy to greater heights. How can the average person profit from it? The answer is simple: own stocks.
Many people wrongly envisage endless obstacles to succeeding with stocks. They think deep specialised knowledge or large sums of cash are requisites for beginning. Some simply fear market volatility. But building wealth through stocks is pretty easy – easier than ever – requiring only patience, discipline and time.
That was not always so. When my career began 54 years ago, most investors faced huge challenges. Before the internet, information was sparse. Research involved scouring library archives and microfiche (pieces of film with tiny images of documents and diagrams) for news and corporate reports. Seeking facts about foreign firms was downright arduous.
US stock trade commissions remained fixed at roughly 2 per cent until 1975. Fat bid/ask spreads – the gap between buyers’ and sellers’ offering prices – further eroded returns. Markets worldwide featured similar frictions.
All that has eased, starting with America’s 1975 “May Day” reforms, which scrapped fixed commissions. In 1986, the UK did the same as part of its “Big Bang” financial deregulation and many other major financial markets have followed. Trading became increasingly electronic and hence far more efficient. Now, anyone can open online accounts with next to nothing and trade for almost free with tiny bid/ask spreads. Investors can even buy slices of shares. Meanwhile, mobile phones harness oceans of information and data instantly.
Doubters may reply that they are miserable stock pickers or lack the time to properly research companies. But neither prescience nor an abundance of time is needed to succeed.
Many exchange-traded funds (ETFs) let investors easily own the broader market. These funds provide a stake in the innovation and growth of the whole world’s economies for near-zero costs. Owning a broad fund means a crystal ball is not required to pinpoint the next tech goliath or retail powerhouse. Fund holders have a stake in the ever-changing list of the best firms the world has to offer as capitalism’s progress ceaselessly snowballs.
And snowball it will. Many giant market darlings from decades past are gone or withered away, replaced by new upstarts. Take the National Cash Register (NCR), a US firm from the late 1800s building cash registers that many decades later morphed into the fifth-largest American computer maker. It was a titan! AT&T bought it in 1991 in a then-massive $7.4 billion deal – $18.2 billion in today’s dollars.
Since then, NCR was spun off, turned upside-down and split into pieces. Once among the biggest, now far fallen. In its place new titans emerged.
That is not an anomaly. In 2024, I detailed here the creative destruction driving capitalism’s magic. It keeps churning. Of today’s 20 biggest publicly traded firms worldwide, only four made the top 20 in 2010. Only one was in the top 20 in 1990. None were in the 1970 top 20. Many of those 1970 giants, firms expected to dominate forever, such as AT&T or IBM, were leapfrogged by newer, upstart innovative competitors.
This is not a bug. Churn and leapfrog from small to huge among the biggest firms is a defining feature of capitalism. It is growth, innovation and evolution in action. A diversified equity portfolio harnesses its spoils. Neither gold nor Bitcoin do that, nor do bonds. Private equity may, but it is costly and illiquid.
Owning a broad chunk of stocks or the whole market will not yield fast riches. But if held through all the market’s ups and downs, a diverse portfolio builds real wealth better and easier than virtually any other categorical alternative. Since reliably accurate data start in 1925, America’s S&P 500 has annualised 10 per cent.
That does not, however, mean 10 per cent year-in, year-out. US stocks were negative in about a quarter of the years since 1925. But crucially, those 10 per cent annualised returns include the good, the bad and the downright putrid years – even 2008’s 37 per cent plunge. Many investors forget that. They think producing strong long-term returns requires dodging short-term downside. Hence they try to time their participation in stocks, mostly to their detriment.
Others fail to begin, thinking they lack the cash to generate difference-making returns. But the miracle of compounding allows even a relatively small investment to grow exponentially over time. A $2,400 annual investment –$200 monthly – compounded at even 8 per cent over 30 years becomes nearly $300,000. Setting aside a bit more to invest may be difficult short term. But longer term, that growth far exceeds the cumulative $72,000 principal invested. It is a huge reward for demonstrating patience and discipline.
The barriers are lower than ever and the potential rewards huge. Own stocks to own a long-term piece of growing global creative vibrancy.
