To Those Who Have Lost Faith in Investing is a timely commentary about the faith in the future that is required to be a long term investor in the shares of stock in American companies. As for the required faith, it's about faith in America's future, to be specific.
The article's final paragraph puts it this way: "In some regard, investing based on the weighty evidence of history is the most prudent thing we can do. So far it has always proven to be correct. Every time someone has predicted the death of the stock market, they have been wrong. Given this record, isn't it reasonable to assume that stocks will continue to be better than bonds, and that bonds will continue to be better than cash?"
As you may already know, my answer to the question of stocks for the long run versus bonds versus cash is to own stocks of solid companies.
Yesterday we wrote about the logic behind staying the course when investing for the long term. Many people obviously question that belief, and they are certainly entitled to their own opinion on this highly personal matter. But so am I.
After thinking over why I strongly believe that stocks for the long haul is the proper way to invest, it seemed necessary to acknowledge that historical results are no absolute guarantee of future results. As one sage put it long ago, predictions are dangerous; especially those about the future.
In other words, nobody knows with certainty what will happen in the future. In that respect, it's simply unknowable. That said, Mark Twain reminded us that "History doesn't repeat itself, but it does rhyme." Or as President Truman said, "The only thing new in the world is the history you don't know."
So while we can't know for sure what will happen with respect to the future performance of the market or anything else, that doesn't mean we can't make an informed judgment and be guided accordingly.
My belief in long term stock investing is based on both past results and my faith in our American future. The past results speak for themselves. As the saying goes, we can have our own opinion, but we're not entitled to our own facts. Historically, investing in stocks has beaten all alternative investments by a long shot.
One simple story comparing stocks to the current hottest investment in gold rings true for me. In 1980 gold sold for a then record ~$800 per ounce. The market price of stocks (as measured by the DJIA) was essentially ~$800 as well. A virtual dead heat.
Today gold sells for ~$1,800 per ounce, and the DJIA sells for ~$11,400. Compared to ten years ago, however, gold has done dramatically better than stocks. The fact is that gold is selling at a record high price today, while the DJIA is down a few thousand dollars from its record high a few years ago. People today wish they owned more gold and less stock, because gold has recently outperformed stocks. So our investing timeframe is important when comparing different investment alternatives. I say own stocks.
Most important to me is that the difference between owning gold, or land, for that matter, and stocks is this; solid companies produce and sell things that people want to buy, and they earn profits doing so. They generate cash through their daily operations. Of course, gold and land do not. In fact, it costs money to continue to own them.
Wal-Mart, Exxon, IBM, Apple, Microsoft, Pfizer, Caterpillar, GE, JPMorgan, Wells Fargo, Pepsi and Coke are examples of cash generating companies. Just as they have been for many years, my guess is that these types of companies will be successful performers for decades to come. Some of their profits are mine, too, since as a shareholder I own a piece, albeit a very small piece indeed, of each of these and similar companies. And in addition to the price of their shares rising over time, they generally pay increasing cash dividends as well.
I cast my vote for stock ownership several decades ago, and I firmly believe that America's best days lie ahead. Thus, my continuing faith in our political system of self government combined with our free market system of capitalism makes stock ownership the best investment vehicle for me. If you believe similarly, owning a basket of diversified stocks is probably the right answer for you as well.