Updated: Feb 24, 2021
There is something that I believe is an equity investor's most important visual. I want to share it with all of you today.
Having peace of mind is a critical part of being an equity investor in my opinion. It's what makes it easy to tune out all the mindless drivel that surrounds us every day. Minor economic noise like quarterly earnings, monthly sales figures, GDP numbers, unemployment numbers and all that jazz.
While each of these announcements can move the markets and even individual companies a couple of percentage points upon release, they are all distractions that have no material impact on longer term wealth creation. However its easy to get fixated on these announcements and see stock prices gyrating all over the place and think that there is something more to these things.
The most annoying pronouncements that I find tend to be ones from so called stock market experts that call for bear markets of 40% or 50% and encouraging investors to shift to things such as gold, commodities, bonds and even all cash on occasions. While one or more of these commentators may eventually be correct (extremely unlikely unless the US moves into another Great Depression in my view), investors who panic and move their money into one of these alternative asset classes on the basis of such calls are highly likely to cheat themselves out of one of the highest return asset classes available.
It's at times like these that it becomes helpful to remind yourself as to why you invested in equities in the first place and why the likelihood of a devastating loss that eliminates all your capital is so unlikely, particularly if you own a strong collection of wide moat, high quality businesses.
I always remind myself that shares are representative of underlying claims on a company's cash flow. The valuation of these cash flows does not shift 10-15% over the course of 2-3 months for a company with a strong moat, irrespective of what market moves may tell you. It typically takes years for underlying strength to erode, something which gets progressively telegraphed in earnings results and financials over many years. So market movements and market noise is exactly that, just market movements and market noise.
And what to do about constant claims that we are going to move into a situation where an investor's hard earned capital is about to be decimated? What I suggest to you is take this claim with a large pinch of salt. Why do I say this? It's here where I think the picture below, the most important visual for a long term equity investor, comes into play.
The chart above from Dow Jones & Company is a thing of beauty, because it shows some very important things.
1. First its important to observe the sustained increase in the Dow over many years. From an index value of approximately 40 in 1895, the Dow stands at over 30,000 today. Thats a 700x increase over the 100 years.
2. The stock market has survived numerous recessions over many years, each of which have been of varying degrees of depth and severity as indicated by the chart above. In spite of these major and minor recessions, the index continues to grind higher.
3. In spite of severe economic shocks to the economy, from which the economy has always recovered, the DOW has always ended up overtaking previous highs that were set. In all cases, its been a question of when it would do so, not if.
Investment professionals always caution that past performance is no guarantee of future performance. Its hard to argue with over 120 years of history.
This is what gives me the most comfort as a long term equity investor.