10 truths about the stock market

By TKer by Sam Ro

A mental framework for investors

The stock market can be an intimidating place: it’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes very quickly.

But it’s also a place where thoughtful investors have long accumulated a lot of wealth.

The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

With that in mind, I present to you ten truths about the stock market.

1. The long game is undefeated

There’s nothing the stock market hasn’t overcome.

“Over the long term, the stock market news will be good,” billionaire investor Warren Buffett, the greatest investor in history, wrote in an op-ed for The New York Times during the depths of the global financial crisis. “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

Since that op-ed was published, the market emerged from the global financial crisis. It’s also overcome a U.S. credit rating downgrade and a global pandemic among many other challenges. The Dow closed Thursday at 34,912, just 2% from its all-time high.

Btw, historically you didn’t have to wait a hundred years for positive returns. Since 1926, there’s never been a 20-year period where the stock market didn’t generate a positive return.

While stocks usually go up over much shorter periods, the odds of positive returns improve as you lengthen your time horizon.

2. You can get smoked in the short-term

Bull markets come with lots of bumps in the road.

While the S&P 500 has usually generated positive annual returns, it’s also seen an average drawdown (i.e. a decline from its high) of 14% during those years.

The chart below from JP Morgan Asset Management does a nice job illustrating this…. read more