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Posted: September 17, 2012

Voting with dollars

The stock market is like a popularity contest

Ron Phillips

“The cult of equity is dying,” the famous and controversy-loving Bill Gross recently wrote. The bond manager is the undisputed “bond king,” with his company managing $1.82 trillion dollars. In bonds. Not stocks.

Despite his obvious bias against stocks, he’s gone on the record with his theory of “the New Normal.” This new environment, according to Gross, is an America that barely ekes out a one-percent GDP growth. And lives with persistently-high unemployment.

On the surface, it seems like he’s right. Things are bad. However, we could have believed this theory about the Great Depression, too. It was much worse than today. Remember: we’re working our way through the Great Recession. It’ll take time.

After the 1930s, the U.S. went on to grow faster than ever. The stock market responded in the next decades with the biggest bull market we’ve seen.

WHY DO STOCKS OUTPERFORM?

This “New Normal” idea is why Bill questions stock market returns. He says that GDP has grown by 3.5 percent annually the last 100 years. Stocks have returned 6.6 percent after inflation. Stock investors have been “skimming 3 percent off the top each and every year.” Why?

REASON #1

The market is like a popularity contest. People literally vote with their dollars. Money flows, in billions and trillions, to certain asset classes. Stocks have had more cash flow in than other assets. Just like being the popular, pretty girl at the dance. More dates. More dancing. More returns.

REASON #2

Stocks are small piece of companies. Companies are dynamic and can outpace the growth of an economy. They make profits. They raise prices, grow sales locally and internationally and lower costs. All of this activity often produces better-than-GDP growth. Here’s where we get the “skimming” effect of high investment returns.

REASON #3

As mentioned in my new book, The Armchair Investment Reader, the U.S. is not Europe. We’re vibrant, innovative and growing. Mining asteroids. Private-sector space flights sending civilians into orbit. In-home healthcare robots. The two-year-shelf-life sandwich. 3-D printers churning out customizable bones. Driverless cars. Laser headlights. Sewage-powered cars. All of these ideas are being worked on mainly by American universities and companies. That is innovation. And that’s just the beginning of the dynamism of the United States.

With this culture of growth and innovation, America can break the New Normal idea. We can continue to grow at 3.5 percent. This growth can, in turn, continue the stock market’s high averages.

While stocks aren’t popular with some, I believe we’ll all look back five years from now and say, “What a bargain the U.S. was! I wish I had invested more at those cheap prices.” Only time will tell, but I’ll place my bets on the most dynamic and resilient economy ever built.
 

Ron Phillips is an Independent Financial Advisor and a Pueblo, Colorado native. He and his wife are currently raising their two sons in Pueblo. Order a free copy of his book "Investing To Win" by visiting www.RetireIQ.info or leaving a message on his prerecorded voicemail at 924-5070. Simply mention Promo Code #1001 when ordering.

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Readers Respond

You are ignoring the population situation. Nothing in the history of the world outside of Japans Melt Down has a precedent for a population where there are this many takes for every producer. I suppose perhaps in a completely automated society where things are produced in mass by something other than humans, might work but I don't think we are there yet. This giant suck will result in inflation and perhaps another 10 years for the dinosaurs to die off and stop sucking the production ( through voting for redistribution of wealth) By art reisman on 2012 09 17
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