longterm Tag

“Stocks always go down faster than they go up, but they always go up more than they go down.”

Today’s thought — too long for a gravestone? — is one of my epitaph prospects.

It starts: “Stocks always go down faster than they go up…”

Whether in a day (October 19, 1987) or a month (the Covid crash of March 2020), market drops happen fast. With our instincts toward loss avoidance, we tend to panic out of things.

By contrast, bullishness — or, the persistent willingness of lots of people to propel a stock upward — isn’t triggered by single events. We need evidence to build over time. And so stocks go down faster than they go up.

But then there’s the second part, “… they always go up more than they go down.” Look at any graph of the American or global markets over time and the line runs lower left to upper right. The longer your view, the bigger the mountain.

That is the stock market’s truth… not over the last year perhaps, or the next, or some era cherrypicked by a market bear. That is the market’s truth over the period that matters: the long term. Your lifetime.

Yes, stocks go down! The average bear market, studies show, lasts about 18 months… usually a very un-fun 18 months. But two years in three, the market rises (… one year in three, it declines). You do the math… and play it forward! That’s why the average bull market lasts for years.

F. Scott Fitzgerald wrote, “If you can keep two opposed truths in your mind at the same time, that’s genius.” Today’s food for thought, bolded at top, asks each of us with Fitzgerald to show some genius.

The best way most of us are going to make the most money in our lives is to invest in the stock market, leave it in the market, and add more as we save going forward. That’s just as true today as 50 or 100 years ago.

Stocks always go down faster than they go up, but they always go up more than they go down.

Last time I teased the style box that helps explain why Rule Breaker investing wins. Remember that style boxes oversimplify; they’re cartoonish views of the world. But when we make things as simple as we can (Einstein: “But no simpler”), we give ourselves a clarity that many others lack.

Here’s the style box I use to explain why Rule Breaker Investing works:

The Y axis, labeled “Timeframe,” goes upward from “short-term” to “long-term.” This is the holding period of your investing, with traders at the bottom and investors at the top.

The X axis, labeled “Company Type,” goes rightward from “predictable” to “innovative.” “Predictable” companies predominate the world of business, whether they’re operating oil fields or selling Dunkin Donuts. These companies stay within the defined lines of their industries and their core businesses. The “innovators” are the rare Rule Breakers.

For “Timeframe,” well more than half the financial world operates in a short-term timeframe. So if you’re fishing in the “long-term” pond, you’re already feeling lonely. For “Company Type,” well more than half the corporate world is not only predictable, most of it strives to be even more so! Businesses at scale that challenge the status quo, or completely unravel it, are few and far between.

Thus, if you’re investing in the quadrant of “long-term” and “innovative,” you are among a tiny subset of investors. Most of the long-term capital out there (e.g., the Buffett crowd) has been actively coached and reinforced to avoid innovation. Meantime, most of the “innovator” company stocks are highly volatile, “overpriced.” “Make your money fast before they blow up,” short-termers say, treating them as a “trade.”

Malcolm Gladwell has shown: The best way for David (here, individual investors) to beat Goliath (institutional investors) is by playing the game completely differently. Rule Breaker investors ironically serve as lonely fishers at the market’s most stocked pond. The fish swimming here are the world’s great innovators who’ll provide the most market-crushing long-term returns.

I love this pond, this style box! It’s enriched me, so much, in part because so few find their way here… to our quadrant.