By Abdoulaye Bangoura
Confronting Crisis Through the Power of Stock
Stocks! Stocks! They visit us frequently and invite us to trust in them. They constantly call for us to give them even just a small amount of money in order for that amount of money to grow. The stock market has existed for almost 300 years, with the Amsterdam exchange having been created in 1611. Nowadays, stocks are a widespread phenomenon, with an official stock market existing in at least 111 countries around the world – in total, a market value of 95 trillion dollars. In the modern age, it is both affordable and convenient to buy and sell stocks. Thanks to technology that alleviates the physical burden of trading stock, through just one click, money and information can spread rapidly around the world. Despite this evolution, many young people are deprived of the ability to invest in stock ***. But exactly why is stock the winning method to empower and enrich our generation? In this blog post, I will explain why we should invest our money in the stock market. I will focus only on the comparison between stock and other traditional investments, meaning that I will exclude alternative investment options such as private equity or hedge funds. I will explore four main areas to transform any skeptic into a stock worshiper (return, compound interest, inflation, and taxation), as well as discuss the stock market in terms of demographic issues.
Highlighting High Return
“There’s no such thing as a free lunch.” Especially in the stock market, this is a well-known adage. Therefore, one of the foremost reasons to single out any single asset is its power to yield us a greater return. Money should go where it will be well treated or cherished. Looking back at the history of the previous century, the stock market presents a largely rosy and cheerful picture – more so than bonds, bills, or cash. If you put your money in this wide-range asset class, your stocks would have yielded 10.1% per year, your bonds 4.8% per year, and your bills 4.1% per year in the U.S. during the last century (3). In the UK, we saw similar results; the return of stock was 10.1% per year, bonds 5.4%, and bills 5.1%. Extending our analysis to other markets, stock was still king in the asset kingdom over the last century, with an average return of 10.3%. Furthermore, the economy is just like sport or any other area of human life. Neither good times nor bad will last forever. For example, anyone who’s studied football history knows that even the most successful team have had times when they’ve succeeded and times when they’ve grieved losses. Liverpool, my preferred team, won four European Cups between 1977-1984, but they failed to see another victory until 2005. Real Madrid, the most successful team in the world, won six European Cups between 1956-1966; however, they had to wait until 1998 to win the precious UCL trophy. In the same way, the economy experiences dreams and nightmares. The noticeable behavior regarding stocks is that when the economy is in turmoil, they behave better than bonds or bills. When we focus only on the first 75 years of the previous century, when many economic disasters weakened the economy, stock was the best asset with which to grow your money. In the U.S., the most important equity market, stock return was ahead (4) over this timeframe. We saw that without a doubt, stock was the most reliable place to invest your money during this period. Should we trust stocks again at the beginning of this century? History gives us a solid overview; even if it doesn’t repeat itself exactly, the story of stock is still amazing. The magazine La Presse titled an article for 31 December 2019 “Une decennie benie des dieux sur les marches” to highlight the best performance of the stock market during the 2010-2019 decade. Despite the threat of sovereign debt, the crisis facing Greece at the start of this period, and other misfortunes that swept the market, investing in stock was generally a honeymoon (5). In order to multiply our money, investing in stock is a meaningful plan due to its high return, along with its ability to be resilient in times of crisis.
Time Is Money – Literally
The stock market is an incredible machine that can make people rich or multiply their money. This creation of wealth occurs through compound return. People attribute to Albert Einstein the following quote: “Compound interest is the eighth wonder of the world.” Compound interest is powerful, and it’s a core concept of the value of money over time – meaning, over time, the investor does not earn only the principal interest, but also the interest on the previous period’s interest earnings. To benefit from this mechanism, we should invest early and for a long period of time. The more time we have ahead of us, the more compound interest we earn from the stock market, building significant wealth. Time is a pillar of this notion because compound return rewards patience and discipline. Social media nowadays spreads the idea that you can make quick and easy money. However, in the real world, money is the ally of patience. According to the 2020 edition of Forbes, it takes an average of 21 years to become a billionaire. Some of the world’s richest men such as Carlos Slim took 30 years to amass such a fortune. We can compare the stock market’s compound mechanism to the growth of trees. When a farmer plants seeds in the ground, the seeds do not suddenly become big trees overnight. Although the farmer likely doesn’t see any considerable result even after a couple of years, he should be patient and nurture the seeds. Wealth works in the same way. When you invest in stock or build your own company, your wealth will not necessarily change in the upcoming month or year. Nonetheless, compound interest generates tremendous amounts of money if given enough patience.
Less Risk, More Reward
The third reason you should invest in stocks is that they are less risky than bonds or cash. In the investment world, there’s the widespread idea that bonds or treasury bills issued mainly by a strong and sound government are safer than equity. The underlying reason behind this assumption is that a bond is a debt that promises to repay interest and principal. Moreover, the value of a bond is not correlated with the fluctuation of market value. Unlike equity, it represents a small ownership that entitles its owner to both company profit and loss. Equity pays dividends, and the owner can take advantage of company profit when the market value of that company rises. However, under this scope, equity looks somewhat dangerous because although it can magnify our returns, it can also impede our investment. As a consequence, equity investors should be aware that there will come a time when their investments will shrink. This reality applies even to the very talented investor. For example, during the 1974 oil crisis, Warren Buffet saw the value of his stock dwindle to just 31.8%. This is a facet to keep in mind about risky investments. However, if we shift our conception of risk and focus more on purchasing power, then just like the risk, we should hedge our bets. Equity is deemed less risky than bonds, but readers may notice that generally, bonds provide lower returns than equity. This fact aligns perfectly with the spirit of capitalism, which rewards the risk-taker. Investors should take some level of risk to expect a greater return. In a period of great inflation, holding bonds could be catastrophic for our money. History has shown that when inflation is too high, bondholders cannot achieve a positive real return. Between 1900-2000 in Germany – a country that experienced high inflation – the annual real return for equities was 3.6%, bonds 2.2%, and bills -0.6% (P52).
For this reason, the author of Triumph of Optimism wrote: “This episode remains as a dreadful warning that government bonds and even bills can, under extreme circumstances, experience a real return of -100 percent” Dimson (2001, p. 66). In fact, holding bonds resulted in chaos for the German middle class due to inflation, which financially ruined a record number of people. Inflation lowered the real return of investments, severely affecting their purchasing power. Inflation was present during the previous century, and it will likely continue to be present over our existence. There are two main reasons to believe this:
- The shift in money creation. 1971 marked a breaking point in the history of money. For the first time in human history, physical items were not backed by money***. Until 1970, money was backed by gold under the Bretton Wood Agreement. In the midst of the Vietnam War, Nixon decided that the dollar would not be tied to any material thing. This was the Nixon Shock, and the decision created a new world in which we now live; the so-called fiat money. Under this new monetary system, the government can print money at The aftermath of this is money supply, which is one factor of growing inflation***. Therefore, inflation has the potential to jump tremendously during our era. Hedging inflation is a must, not merely an option in the fiat money system. According to O’ Shaughnessy (2014), “When dollars have no anchor, inflation is a silent killer” (I have the electronic book, so I can’t put the page). In this situation, stocks are more efficient than bonds because they have the ability to give us greater real returns in the inflation world, where bonds and cash generally fail.
- The possible solution of our fiscal deficiency. In many advanced countries, the fiscal situation is in turmoil. To address this huge problem, some governments have historically used inflation to erode the power of It wouldn’t be surprising to see higher inflation in the future. Therefore, forgetting inflation can push our returns downward and turn our financial goals into nightmares, as the power of inflation may tear down our savings. Based on this scenario and other possible threats for our generation, the authors of Coming Generational Storm write, “If the real return isn’t negative before taxes, it most certainly will be negative after taxes.” As a result, depriving yourself of investing in stock is like losing money. Conceptually, the aim of investing is to get returns in the future, so don’t forget rule number one of Warren Buffet: “Never lose money.”
We couldn’t close this chapter on the risk of inflation without taking into consideration the recent changes due to Covid-19. The pandemic had hardly hit our world when it changed our lives. As a result, there has been a drastic change in the economic landscape, and inflation is back at the heart of economic debate this year. Nancy Davis, CIO of Quadratic Capital Management, said on Bloomberg that “Inflation is a bigger risk to investors than a recession.” There is no discussion among economists about the comeback of inflation because the increase of prices in many countries to target inflation has surged over 2%. In fact, in May 2021, according to Statistics Canada, prices went up 3.6% in comparison to May 2020; the highest increase since May 2011. In August 2021, inflation spiked above the previous 18 years in Canada to 4.1% (in comparison to August 2020). The debate between economists is currently focused on the length of inflation. Some believe this level of inflation will only exist for a short time because the increase in prices is due primarily to disruptions in the supply chain. Furthermore, they believe we are assessing two different periods. For them, 2020 was an abnormal year due to Covid. This is the point of view of Desjardin chief economist Jimmy Jean, who explained during his interview on TVA that the price of gas surged 32.5% between August 2020 and 2021. However, this gap is small when we compare August 2021 and August 2019 prior to the pandemic, where there was an increase of 8.9%. Others think we are at the start of long-term inflation. These people think that central banks around the world have printed a lot of money as Covid relief to help households and enterprises. In the U.S., the government spent 1.9 trillion on a Covid relief package. These things have helped put upward pressure on the money supply around the world, which has been rising since 2007 (14% per year in the U.S.). Hence, inflation is set to be a major fear of the global economy for some time. This will damage the savings of many investors in most well-developed countries. For emerging and poor countries, investors who do not think about inflation will face the same reality as their counterparts. In addition, the consequences could be more disastrous in terms of social equilibrium in countries where the living standard is already low. As Jason Desenna Trennert of Strategas Research Partners states, “Only in a rich nation could one exclude nourishment and staying warm as anything other than ‘core.’ Commodity price inflation can thus be very politically destabilizing, especially in countries without strong and flexible systems of governance.” Consequently, no matter whether inflation is temporary or permanent, we should be more cautious about it. We must hedge this for our money wellness, and stock is one of our greatest assets in order to thrive in a world of inflation.
Enabling Generational Solidarity Through Stock
Currently, many developed countries are facing the scourge of debt. In November 2004, Jean Philippe Cotis expressed his worries in the Financial Times about the collapse of the majority of developed countries because they are not able to handle their budget shortfalls. He stated, “We are going to bequeath to our children the capital growth, which will be grossly undersized” and that “We are sacrificing our children.” Debt has become unbearable, and the demographic situation won’t be able to help sustain things without some major change to programs in the future. For example, social security is supposed to enable solidarity between generations. In many Western countries, social security was created after World War Two. The goal of social security was to support elderly people by taxing current workers. This pattern works when we have a lot of young people who enter the job market to pay for the retirement of the elderly. However, this situation is no longer the case because of a major revolution in terms of demographics. When social security was created, the majority of people were young, but because of advances in health and science, the population has since gotten significantly older. In the U.S. in 1900, only 4.1% of the population was 65 years or older. In 2000, this population made up 12.4%, and this figure is only expected to continue increasing. This means that in the future, one of the greatest challenges for many nations will be how to look after their elderly rather than their children. Hence, the authors of Coming Generational Storm wrote: “After centuries where few people were old and nurturing children was the primary social concern, children will become a small minority around the globe. The primary social concern will be caring for the elderly.” This situation has a huge impact on our society and could be devastating for public solidarity for two key reasons:
- First, old people are costly. The expenses necessary to care for the elderly are higher than that of In 1995, federal spending per child (under 18 years) in the U.S. was $1,693, but it was $15,636 for people aged 65 and over.
- Second, the rise of elderly people is the consequence of the shrinking population of young people. The number 2.1 is a magical onefor demographics; it expresses the replacement rate. When we examine the fertility rate of many developed nations, it’s clear these nations are in jeopardy. The fertility rate is below this magic number, which means that without any kind of revolution in fertility, it will be difficult to substitute for the Moreover, without reform, the benefits from social security will recede. According to U.S. social security statistics, the number of workers per social security paycheck was 16.5% in 1950. By 2000, this figure had decreased to 3.4%.
The combination of these two factors means we cannot rely too much on public solidarity for our retirement. Can we instead rely on private solidarity? A wedding is a contract that links two people and enables them to express their love. However, we can also view weddings as an enterprise; a partnership in which each partner looks after the other emotionally, financially, and so on. As a result, in this way, the partners help each other and decrease one another’s financial burden. When we assess the length of modern marriage, we can conclude that most of us will not experience as long a marriage as our parents. Because the divorce rate is increasing, it will be difficult to take advantage of the financial benefits of weddings. In the future, there will be more and more single mothers or fathers who need to take care of themselves and their children. This is just one example that proves that even private solidarity is not as strong nowadays as it once was. Therefore, one wealth survival strategy is to seek out investments that bring more return and financial autonomy. When both public and private solidarity are in turmoil, stock becomes an alternative to our means of survival.
