14/10/2024
If you had invested $1,000 in the S&P 500 in 1974, your investment would have grown to approximately $228,510 by the end of 2024, assuming all dividends were reinvested. This represents an impressive cumulative return of 22,751% over 50 years.
Along the way, the market experienced many ups and downs, with declines of 6-10%, and even drops over 20% or close to 50%. But despite this volatility, long-term investors have always come out ahead.
Volatility Isn’t Risk
Volatility (market fluctuations) isn't a real risk unless you need to access your money in the short term. If you’re investing with borrowed money, volatility can be risky because you might lose everything during a big market drop. However, long-term investors don’t need to worry much about daily ups and downs.
The Power of Long-Term Investing
Wealth is built through long-term investing. Constant buying and selling won’t create sustainable wealth. The real value comes from staying invested. Warren Buffett famously said, “If the stock market closed for 5 years, it wouldn’t bother me.” That’s because true investors focus on how well a company is doing, not daily price movements.
Avoid Leverage and Shorting
Leverage (borrowing money to invest) can be dangerous because even small market swings can wipe out your investment. Shorting stocks (betting they will drop) is equally risky, as prices can rise longer than you expect, and you can lose more than your initial investment. Even if you're correct about a stock being overpriced, you can’t predict how long it will continue rising.
Time Horizon Matters
If your investment timeline is short, the stock market can be risky. No one can predict what stocks will do in the short term. But if you look at stocks as owning part of a business and think like an owner, you’ll be more comfortable riding out the short-term volatility. Remember, stocks represent ownership in companies, and over time, their true value shines through.
The Market is Liquid
Unlike other investments, the stock market is highly liquid—you can sell your stocks instantly. For example, 10.39 billion shares are traded daily in the U.S. stock market, with a total market value of $55 trillion. This liquidity can be a double-edged sword because it tempts investors to make irrational decisions, as Benjamin Graham put it, "In the short term, the market is a voting machine, but in the long term, it’s a weighing machine." The key is staying rational in the face of daily market swings. Instead of watching stock prices every day, focus on a company's fundamentals.
A good example comes from Charlie Munger, who explained at a Berkshire Hathaway meeting that a company like Microsoft, which consistently increases earnings, reduces outstanding shares, grows its market share, improves operating margins, revenues, and cash flows, and wisely reinvests its retained earnings to create more value for shareholders, is the kind of business you want to own, as its stock price will eventually reflect the strength of its fundamentals, rather than fluctuating based on the daily whims of the stock market.
In summary, the stock market is about owning businesses, and businesses that perform well over time will reward their investors. Stay rational, focus on the long-term health of your investments, and ignore the short-term noise.