People like me talk about publicly traded stocks a lot. A whole lot! Why don't I talk about real estate, bonds, Crypto, private securities, Gold, Silver, Art, Whole Life, CDs, etc. There is a very good reason why people should focus specifically on publicly traded stocks and that is what this newsletter is about. Publicly traded stocks have created a great deal of wealth for many people. Why? How? Let's dig into the issue.
Let's start with what a publicly traded stock is. Once upon a time a business had an initial public offering (IPO), creating a stock that was connected to their business. Once the IPO is over (usually centered around large institutional buying), it is offered to the retail investor (us). We can then buy that stock on the exchange that brought it to market. If we don't buy it there, we can buy it on the secondary market.
Most retail investors end up owning stock in the secondary market as they own mutual funds and exchange traded funds (ETFs). We don't own the stock directly, but indirectly we do as we pool our assets with others to reduce the risk of owning just one or two businesses, which could go bankrupt (many do every year). We then trade those mutual funds or ETFs on the open market with other investors.
Okay, that is all well and good, but so what? Those businesses you end up buying on the open market are very liquid so it is easy to find a buyer and seller as needed when you are buying and selling. This is important. Private securities tend to be very illiquid, which means you may not have a buyer or seller when you need the money. Publicly traded stocks and their liquidity is a BIG deal.
Let's take a step back. Owning publicly traded stocks in a mutual fund is far superior than owning individual stocks because of the risk. ANY company can go bankrupt, which is why we avoid buying and selling individual stocks. Owning a mutual fund that owns thousands of stocks is by far the way to grow your wealth over time, as bankrupt companies are replaced periodically with new fast growing businesses.
Publicly traded mutual funds owning the entire U.S. economy have returned over 10% per year on average over the last 50+ years. To make sure we get that return, we stick with index funds or ETFs, squeezing out most of the fees that go to Wall Street and ending up reducing our return over time. We can do the same with international index funds, minimizing the fees and ultimately, maximizing the returns.
Do we know what the future holds for stocks? No, we do not and we should not listen to anyone who tells us they know. They don't. We can only look back in time to see what has worked and what has not. Here is what has worked. Vast diversification by owning thousands of companies, at the lowest possible cost and then feeding that portfolio month after month, year after year, and decade after decade.
That almost sounds too simple. Yet, it has worked beautifully for hundreds of thousands of people (including myself). All we really have to do is replicate it instead of trying to find something new and "better" that will beat this very simple approach to creating wealth and ultimately, leading to financial freedom. It is one very big distraction full of noise that gets in the way of sound investing.
The beauty of this approach is just how simple it really is. It applies Occam's razor to investing our money. The more complicated the investment, the worse off it will be for you and me in most cases. Index funds are simple. The rest of the investing world is not so simple. It comes back to an analogy I have stated before. Do you want to be the casino or the gambler? The index fund is the casino.
Here is a story that illustrations how important low cost stock index funds are to your future wealth creation. A woman sees a $500 purse at a store and loves it, but she decides to look elsewhere for a better deal. She ends up finding it. The same exact purse is found in a store that you must travel to. The purse cost $15. Where is she going to buy the purse? I think we know the answer.
Stock index funds held at places like Vanguard and Fidelity are those $15 purses. Why doesn't everyone buy the $15 purse? They don't know it exists. Some buy the expensive purse and decide not to look elsewhere, even after hearing about the deep discount. That is a mistake. When you add multiple purchases of purses (mutual fund shares) over a lifetime, that is a great deal of money!
Why do those publicly traded businesses do so well over time? They are in the business of making money for their shareholders (indirectly that is you and me). If inflation kicks in, they will raise their prices to provide that margin needed to make money and of course, when they make money (earnings), you and I make money. This is a BIG point. Those publicly traded businesses help us stay ahead of inflation.
What is there left to say? Publicly traded stocks have helped the average person move up in life better than any other investment by far. They did it in the past and I am confident they will do it in the future. Live below your means, save a decent chunk of money and keep funding those low cost stock index funds. That is Warren Buffet's advice. Listen to the greatest investor of our time. I did.
The future is bright. Believe in that and believe in YOU.
