But there could also be one buyer willing to pay a lot for those shares. It just doesn't have anything to do with the price.Mofritty wrote: ↑Wed Apr 17, 2019 9:34 amA great example of there being less buyers than sellers is a company stock buyback whereby demand is low, price is suppressed, there is one buyer offering the suppressed market rate and there are many individual sellers. Number of stocks bought vs sold is equal. Number of buyers vs sellers is disproportionate.White Coat Investor wrote: ↑Tue Apr 16, 2019 5:34 pmIt seems to me that every buyer has a seller and vice versa. This explanation for stock market movement never made sense to me.
Why does the stock market go up in the long term?
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Re: Why does the stock market go up in the long term?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy |
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
- White Coat Investor
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Re: Why does the stock market go up in the long term?
People are simply willing to pay more or less. That's it. They think the asset is worth more. It has nothing to do with the number of buyers or sellers.Mofritty wrote: ↑Wed Apr 17, 2019 8:20 amOf course there are not more stocks being sold than bought, but can you explain fluctuation in price independent of value without including demand. Sellers wanting to sell have to sell for less than they paid to create a demand that is no longer there. If this weren’t real would there ever be any discussion whatsoever on market timing?White Coat Investor wrote: ↑Tue Apr 16, 2019 5:34 pmIt seems to me that every buyer has a seller and vice versa. This explanation for stock market movement never made sense to me.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy |
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Why does the stock market go up in the long term?
Thank you for your perspective Whitecoatinvestor. Although I am not sure it is any more or less accurate than mine I can appreciate that ours are different from one another.
Last edited by Orbuculum Nongata on Wed Apr 17, 2019 1:02 pm, edited 1 time in total.
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Re: Why does the stock market go up in the long term?
Part of the reason is because CEOs force workers to produce more and more and pay them less and less.
Other reasons are population growth and innovation.
Last reason is more people buying than selling.
Other reasons are population growth and innovation.
Last reason is more people buying than selling.
Re: Why does the stock market go up in the long term?
Stocks track the prices of the things you need to purchase.
So the value of having stocks is not that they go up, it's that $100 worth of, say, food stocks will buy the same amount of food 30 years from now no matter what it costs, higher or lower.
So the value of having stocks is not that they go up, it's that $100 worth of, say, food stocks will buy the same amount of food 30 years from now no matter what it costs, higher or lower.
Re: Why does the stock market go up in the long term?
{I deleted an off-topic political comment. Moderator Jbranx.}
Re: Why does the stock market go up in the long term?
That is correct...if the market was comprised of the exact same stocks, for all of its life. Companies that comprise the stock market change all the time. So as long as there's trust in economy the markets will move up.a stock could just as easily underperform as overperform expectations.
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart
- gmaynardkrebs
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Re: Why does the stock market go up in the long term?
What do you mean by "trust in the economy"?220volt wrote: ↑Wed Apr 17, 2019 3:05 pmThat is correct...if the market was comprised of the exact same stocks, for all of its life. Companies that comprise the stock market change all the time. So as long as there's trust in economy the markets will move up.a stock could just as easily underperform as overperform expectations.
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Re: Why does the stock market go up in the long term?
Ultimately, you are depending on the active investors to make good decisions over the long run. If they are rational, they will only invest if they expect to make money in the future from their investment. So you depend on them to set the market price about right so they, and you, will get growth and gains in the future.
Does it make you uneasy that you are relying on those who haven't figured out the advantages of passive investing? Let's hope someone is making smart decisions.
Does it make you uneasy that you are relying on those who haven't figured out the advantages of passive investing? Let's hope someone is making smart decisions.
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Re: Why does the stock market go up in the long term?
I would think that most of the active investing is done professional investors. They are aware of the "advantages" of passive, but it's not what they are paid to do.ReadyOrNot wrote: ↑Wed Apr 17, 2019 4:25 pm Ultimately, you are depending on the active investors to make good decisions over the long run. If they are rational, they will only invest if they expect to make money in the future from their investment. So you depend on them to set the market price about right so they, and you, will get growth and gains in the future.
Does it make you uneasy that you are relying on those who haven't figured out the advantages of passive investing? Let's hope someone is making smart decisions.
Re: Why does the stock market go up in the long term?
The whole money system is based on trust. From the smallest money transaction between you and the coffee shop to the big central banking exchanges, public stock trading, etc...
Without trust, you have no economy or the stock market. So as long as people trust that the economy is moving in the right direction the markets will follow. Warren Buffet keeps repeating this in almost every interview.
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart
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Re: Why does the stock market go up in the long term?
@220Volt
Thanks for clarifying.
Thanks for clarifying.
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Re: Why does the stock market go up in the long term?
Aren't there going to be a lot more sellers as baby boomers retire and start living off their investments? I also think this will impact the supply of workers, reducing unemployment and making it harder to fill jobs. Therefore increasing wages. If companies have to pay more, their expenses rise and valuations could take a hit.
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Re: Why does the stock market go up in the long term?
Reviving a zombie thread here...
Just testing my understanding. This question (why do we expect the stock market to always go up over the long term) seems to be a simple answer, to me at least.
“Stocks can be expected to generate positive real returns because their expected earnings are discounted at a discount rate that is greater than the expected inflation rate. Even if we never expect a company to grow their profits, we can still expect the stock to “go up” ie generate real positive returns so as long as the discount rate is sufficiently high. And the discount rate always is sufficiently high due to the implicit risks associated with equity ownership.”
Does anyone agree/disagree with my statement? This makes plenty of sense to me, but I’m not well versed in equity valuation so maybe there’s a flaw to my mental model that I’m missing.
Just testing my understanding. This question (why do we expect the stock market to always go up over the long term) seems to be a simple answer, to me at least.
“Stocks can be expected to generate positive real returns because their expected earnings are discounted at a discount rate that is greater than the expected inflation rate. Even if we never expect a company to grow their profits, we can still expect the stock to “go up” ie generate real positive returns so as long as the discount rate is sufficiently high. And the discount rate always is sufficiently high due to the implicit risks associated with equity ownership.”
Does anyone agree/disagree with my statement? This makes plenty of sense to me, but I’m not well versed in equity valuation so maybe there’s a flaw to my mental model that I’m missing.
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Re: Why does the stock market go up in the long term?
I'm no expert, but I don't think the discount rate has anything to do with the equity risk premium, as this sentence seems to suggest.("And the discount rate always is sufficiently high due to the implicit risks associated with equity ownership.”) Perhaps someone can chime in with an full explanation.absolute zero wrote: ↑Thu Sep 24, 2020 11:51 am Reviving a zombie thread here...
Just testing my understanding. This question (why do we expect the stock market to always go up over the long term) seems to be a simple answer, to me at least.
“Stocks can be expected to generate positive real returns because their expected earnings are discounted at a discount rate that is greater than the expected inflation rate. Even if we never expect a company to grow their profits, we can still expect the stock to “go up” ie generate real positive returns so as long as the discount rate is sufficiently high. And the discount rate always is sufficiently high due to the implicit risks associated with equity ownership.”
Does anyone agree/disagree with my statement? This makes plenty of sense to me, but I’m not well versed in equity valuation so maybe there’s a flaw to my mental model that I’m missing.
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Re: Why does the stock market go up in the long term?
Simple
US increasingly productive
Increasing productivity generates more cashflow
Price increases for productive assets that generate increasing amounts of cashflow
The stock market is a collection of increasingly productive assets that generate increasing amounts of cash flow
US increasingly productive
Increasing productivity generates more cashflow
Price increases for productive assets that generate increasing amounts of cashflow
The stock market is a collection of increasingly productive assets that generate increasing amounts of cash flow
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Re: Why does the stock market go up in the long term?
I do believe there is a push towards increased productivity.
Anecdote 1: Head of administration in the university I work for said "I estimate we get about ten percent more efficient per year" , talking about the output of the university admin.
Anecdote 2: An engineer at Saab said: The amount of working hours going into producing a Saab [automobile] now is about half compared to 20 years back.
This is my understanding of how stocks can just continue to go up.
Anecdote 1: Head of administration in the university I work for said "I estimate we get about ten percent more efficient per year" , talking about the output of the university admin.
Anecdote 2: An engineer at Saab said: The amount of working hours going into producing a Saab [automobile] now is about half compared to 20 years back.
This is my understanding of how stocks can just continue to go up.
Re: Why does the stock market go up in the long term?
Well said. Food for thought indeed.Quickfoot wrote: ↑Tue Apr 16, 2019 9:20 am Over time the trend is for the stock market to go up but it doesn't always go up, stock markets can and have gone to zero or stagnate for long periods of time. We are rewarded for one thing in life: assuming risk. Without risk there would be no room for return, and that's true of financial markets, marriages, careers, and everything else in life.
History shows us a country's share of worldwide GDP rises and falls, having a well diversified global portfolio does more than tame volatility, it also prepares the portfolio for the inevitable collapse of US domination of worldwide GDP. That may happen in our lifetime or 200 years but it will happen and most people wont see it coming.
Re: Why does the stock market go up in the long term?
There have already been a variety of answers to this question, but I'd like to comment only on one interesting aspect of it. Economists like to isolate and examine phenomena that take place within a certain set of boundary conditions. But we rarely discuss what those boundary conditions are, or think about what would happen outside of them. It's important because your question in the title purports to discuss a sort of general law. But we're looking at a trend that, if you step back enough, has some important boundary conditions.
I think there are at least two pretty significant ones: (1) industrialization, which is something we've seen since the mid-19th century at the earliest -- and (2) the current U.S.-led world political system. You can at least roughly track the impact of industrialization by looking at the explosion of the world population since it took off. Yet there are a lot of questions about whether or how the productivity growth we've seen from industrialization will or can continue. I think it's important to recognize that no one really understands this. Sustainability is a big question mark. Essentially, we got really good at setting enormous amounts of stuff on fire. But you can't keep setting stuff on fire forever. Also consider the slowdown in the rate of scientific discoveries.
On the second point, notice how much stock market returns have been dependent on U.S. companies. And how the U.S. has been insulated from political instability and conflict over the time range that we normally look at when evaluating market performance. I hope that continues to be true, but there is no social "scientist" who can tell you if and when that stands to change.
Folks have already gestured at these issues, and they do so pretty often here. But it's worth recalling here why the trend in the stock market isn't something like a scientific law. As long as those general boundary conditions hold up, though, I think it's a reasonable expectation that the market will go up in the long term.
I think there are at least two pretty significant ones: (1) industrialization, which is something we've seen since the mid-19th century at the earliest -- and (2) the current U.S.-led world political system. You can at least roughly track the impact of industrialization by looking at the explosion of the world population since it took off. Yet there are a lot of questions about whether or how the productivity growth we've seen from industrialization will or can continue. I think it's important to recognize that no one really understands this. Sustainability is a big question mark. Essentially, we got really good at setting enormous amounts of stuff on fire. But you can't keep setting stuff on fire forever. Also consider the slowdown in the rate of scientific discoveries.
On the second point, notice how much stock market returns have been dependent on U.S. companies. And how the U.S. has been insulated from political instability and conflict over the time range that we normally look at when evaluating market performance. I hope that continues to be true, but there is no social "scientist" who can tell you if and when that stands to change.
Folks have already gestured at these issues, and they do so pretty often here. But it's worth recalling here why the trend in the stock market isn't something like a scientific law. As long as those general boundary conditions hold up, though, I think it's a reasonable expectation that the market will go up in the long term.
Re: Why does the stock market go up in the long term?
Lets say that the Acme company makes explosive tennis balls and their earnings are $1 per share and their price to earnings ratio is 10 so the value of one share is $10. Ten years later Acme's earnings have grown to $2 per share and the P/E ratio is still 10 so the value of one share is now $20. That's why the stock market goes up. Don't say no one would buy explosive tennis balls. Wile E. Coyote would, so there you have it.
Slow and steady wins the race.
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Re: Why does the stock market go up in the long term?
Right, but your example is assuming that investors kept the P/E at 10 as Acme's earnings went up over time. There's nothing guaranteeing that, the investors might not like to invest in Acme for whatever reason and its P/E might drop to 5, in which case the share price remains at $10.Abe wrote: ↑Fri Oct 22, 2021 5:07 pm Lets say that the Acme company makes explosive tennis balls and their earnings are $1 per share and their price to earnings ratio is 10 so the value of one share is $10. Ten years later Acme's earnings have grown to $2 per share and the P/E ratio is still 10 so the value of one share is now $20. That's why the stock market goes up. Don't say no one would buy explosive tennis balls. Wile E. Coyote would, so there you have it.
Re: Why does the stock market go up in the long term?
Because it's not a closed system.FatFire87a wrote: ↑Tue Apr 16, 2019 8:00 am Everyone says: the stock market will always go up in the long term. Why is that the case?
Billions of people go to work each day and input their work into the system, and resources are pulled from the ground and input into the system and so the entire system grows more valuable over time.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: Why does the stock market go up in the long term?
That's true, but don't you think that if Acme's earnings are growing at 7% per year for over 10 years its more likely that investors would pay more for a dollar of earnings than less.Marseille07 wrote: ↑Fri Oct 22, 2021 5:12 pmRight, but your example is assuming that investors kept the P/E at 10 as Acme's earnings went up over time. There's nothing guaranteeing that, the investors might not like to invest in Acme for whatever reason and its P/E might drop to 5, in which case the share price remains at $10.Abe wrote: ↑Fri Oct 22, 2021 5:07 pm Lets say that the Acme company makes explosive tennis balls and their earnings are $1 per share and their price to earnings ratio is 10 so the value of one share is $10. Ten years later Acme's earnings have grown to $2 per share and the P/E ratio is still 10 so the value of one share is now $20. That's why the stock market goes up. Don't say no one would buy explosive tennis balls. Wile E. Coyote would, so there you have it.
Slow and steady wins the race.
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Re: Why does the stock market go up in the long term?
This more or less. If the share of the economy controlled by public corporations stops growing and/or is no longer profitable, then stock prices and dividend related returns will stop rising and may likely fall.flaccidsteele wrote: ↑Thu Sep 24, 2020 12:25 pm Simple
US increasingly productive
Increasing productivity generates more cashflow
Price increases for productive assets that generate increasing amounts of cashflow
The stock market is a collection of increasingly productive assets that generate increasing amounts of cash flow
Note that I carefully point to the public corporation, because federal, state and regional government entities, foreign corporations and private enterprises are significant parts of the US economy, that also compete for the investment dollars.
Last edited by BogleFan510 on Fri Oct 22, 2021 5:27 pm, edited 2 times in total.
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Re: Why does the stock market go up in the long term?
Everyone else seems to be answering why earnings will keep going up, but I think your point was more why the market as a whole goes up, even if it just meets expectations (or underperforms them). Here are some quick thoughts:FatFire87a wrote: ↑Tue Apr 16, 2019 8:00 am Everyone says: the stock market will always go up in the long term. Why is that the case?
Stock prices reflect the expected net present value of all future earnings. If a company reports lower than expected earnings the stock price tends to drop and vice versa.
Why does the stock market as a whole seem to always go up? That would seem to suggest that stocks consistently outperform expectations. Why doesn’t the stock market fluctuate up or down, but remain relatively stable? It seems to me a stock could just as easily underperform as overperform expectations.
Because the discount rate is higher than the risk-free rate (and of course 0%) dependent on the implied risk that the earnings won't be as expected.
If the discount rate simply was equal to inflation, then yeah stocks would be expected to have a 0% real return, and some would outperform while others underperformed. But nobody would take that risk, that is gambling. Thus the market prices in an implied rate to discount those future earnings at, making it worth the risk. Thus even if a company (or market) simply meets the expected earnings, it will still get that discount rate as a return. If it underperforms, the performance will go down, but could still very well be positive. Of course if it overperforms expectations it'll do even better.
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Re: Why does the stock market go up in the long term?
That's a reasonable assumption. A company like this stays undervalued for a very long time though: https://finance.yahoo.com/quote/INFN/ke ... ics?p=INFNAbe wrote: ↑Fri Oct 22, 2021 5:20 pmThat's true, but don't you think that if Acme's earnings are growing at 7% per year for over 10 years its more likely that investors would pay more for a dollar of earnings than less.Marseille07 wrote: ↑Fri Oct 22, 2021 5:12 pmRight, but your example is assuming that investors kept the P/E at 10 as Acme's earnings went up over time. There's nothing guaranteeing that, the investors might not like to invest in Acme for whatever reason and its P/E might drop to 5, in which case the share price remains at $10.Abe wrote: ↑Fri Oct 22, 2021 5:07 pm Lets say that the Acme company makes explosive tennis balls and their earnings are $1 per share and their price to earnings ratio is 10 so the value of one share is $10. Ten years later Acme's earnings have grown to $2 per share and the P/E ratio is still 10 so the value of one share is now $20. That's why the stock market goes up. Don't say no one would buy explosive tennis balls. Wile E. Coyote would, so there you have it.
Last edited by Marseille07 on Fri Oct 22, 2021 6:17 pm, edited 1 time in total.
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Re: Why does the stock market go up in the long term?
because the companies that fail go out of the chart?
where is the chart showing corporate bankruptcies, stock delistings, ratings downgrades, defaulted bonds?
that would be quite a chart!
you could superimpose it on our sunny chart that always goes up.
if something cannot continue it will not.
PS, I felt the same way in 1996.
„Everything that will be invented has been invented.“
— US patent and customs agent, 1867.
where is the chart showing corporate bankruptcies, stock delistings, ratings downgrades, defaulted bonds?
that would be quite a chart!
you could superimpose it on our sunny chart that always goes up.
if something cannot continue it will not.
PS, I felt the same way in 1996.
„Everything that will be invented has been invented.“
— US patent and customs agent, 1867.
Last edited by AnnetteLouisan on Fri Oct 22, 2021 6:37 pm, edited 1 time in total.
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Re: Why does the stock market go up in the long term?
I think a lot of people missed your point. You seem to understand well that earnings will always go up. Population. Productivity. Inflation. (Duh)FatFire87a wrote: ↑Tue Apr 16, 2019 8:00 am Everyone says: the stock market will always go up in the long term. Why is that the case?
Stock prices reflect the expected net present value of all future earnings. If a company reports lower than expected earnings the stock price tends to drop and vice versa.
Why does the stock market as a whole seem to always go up? That would seem to suggest that stocks consistently outperform expectations. Why doesn’t the stock market fluctuate up or down, but remain relatively stable? It seems to me a stock could just as easily underperform as overperform expectations.
I know that long term there are several tailwinds for earnings to increase. Inflation. Population growth. Improved productivity. New markets. Technological innovation. Etc. But all of these factors should be baked into the price of a stock. If you estimate that a company’s earnings will increase 3% a year for the next 20 years, you can buy at a price that reflects this. The only way for such a stock price to change from what you paid would be for earnings to increase faster than expected, which would lead to a stock price increase, or not as fast as you expect, leading to a stock price decrease.
For the stock market to always go up over the long term, that would seem to suggest that stocks are perpetually outperforming expectations, which doesn’t seem to make sense.
Thanks in advance everyone.
But that's not your question is it. Your question is doesn't the dividend discount model discount all of those projected future earnings to the present.
My guess is when projecting the earnings of a company, any projection beyond 10 years would have more uncertainty so we have to value them less, or just stop the projection. The numerator of the DDM is future value. If we're only 50% sure that Amazon will have earnings of 100 trillion in year 2050, their value is less right? And then we discount half of 100 trillion to the present.
Alternatively maybe a higher discount factor is used.
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Re: Why does the stock market go up in the long term?
I am bullish on America and investing. But I really think there are a number of things wrong with the chart that purports to show stocks „always going up in the long term,“ it’s hard to articulate. If I‘m wrong please explain - I‘m genuinely curious.
It’s like longevity charts v mortality charts. Longevity may be long term increasing, which is awesome. But if the showed a chart that reflected all the folks who got sick and died, that would be pretty gruesome and less sunny.
My issue is, how useful is a chart from which companies are added and removed? Also, there are more companies now and more investors. Back in 1923 how many of each were there? So how useful is it to compare the two periods in the same chart.
Say you have ten Holsteins in Year 1. Six die and are replaced and by Year 5 you have ten healthy productive Holsteins with a great track record. So did everything go up? No, six died! But they aren’t counted and were replaced. How accurate is anything where you add and subtract stuff halfway through (or, in the case of a stock index, continuously?) That’s not an accurate chart.
Does anyone get what I‘m trying to say? My point is, a selection process occurred. The ones that do well do well! Yay, but you bought the first ten Holsteins. And you had to pay for 16 to get the yield of ten.
People tell me the charts reflect all the stocks including the bankrupt, delisted, etc companies. But are those companies reflected only in the year they leave the index? Shouldn’t that negative be included in all future years for the chart to be accurate?
It’s like longevity charts v mortality charts. Longevity may be long term increasing, which is awesome. But if the showed a chart that reflected all the folks who got sick and died, that would be pretty gruesome and less sunny.
My issue is, how useful is a chart from which companies are added and removed? Also, there are more companies now and more investors. Back in 1923 how many of each were there? So how useful is it to compare the two periods in the same chart.
Say you have ten Holsteins in Year 1. Six die and are replaced and by Year 5 you have ten healthy productive Holsteins with a great track record. So did everything go up? No, six died! But they aren’t counted and were replaced. How accurate is anything where you add and subtract stuff halfway through (or, in the case of a stock index, continuously?) That’s not an accurate chart.
Does anyone get what I‘m trying to say? My point is, a selection process occurred. The ones that do well do well! Yay, but you bought the first ten Holsteins. And you had to pay for 16 to get the yield of ten.
People tell me the charts reflect all the stocks including the bankrupt, delisted, etc companies. But are those companies reflected only in the year they leave the index? Shouldn’t that negative be included in all future years for the chart to be accurate?
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Re: Why does the stock market go up in the long term?
I don’t know the answer. I guess everyone believes that market will go up so they buy at any price to sell at a higher price later thus resulting in continued rise in the market. I don’t think it’s much different than crypto and because it’s happening for so long and so many people are involved that it feels logical. There is no logic behind it but this has been the surest way to make money in the long term so I am also playing this game. IMO passive indexing is the cheapest and easiest way to play this game so here we are.
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Re: Why does the stock market go up in the long term?
Note that Acme doesn’t need to grow their earnings in order to generate a profitable investment. Acme can continue to earn $1 per share for many decades, and an investor in Acme can see their money grow at a healthy pace during those decades.Abe wrote: ↑Fri Oct 22, 2021 5:07 pm Lets say that the Acme company makes explosive tennis balls and their earnings are $1 per share and their price to earnings ratio is 10 so the value of one share is $10. Ten years later Acme's earnings have grown to $2 per share and the P/E ratio is still 10 so the value of one share is now $20. That's why the stock market goes up. Don't say no one would buy explosive tennis balls. Wile E. Coyote would, so there you have it.
Last edited by absolute zero on Fri Oct 22, 2021 10:37 pm, edited 1 time in total.
Re: Why does the stock market go up in the long term?
I think you will find the following thread very informative:
viewtopic.php?f=10&t=281369
Another factor is that corporate leverage magnifies the return to equity, as explained in this post:
viewtopic.php?p=5997255#p5997255
viewtopic.php?f=10&t=281369
Another factor is that corporate leverage magnifies the return to equity, as explained in this post:
viewtopic.php?p=5997255#p5997255
Re: Why does the stock market go up in the long term?
I am not a historical scholar, but I always understood that it was the Dutch, in the early 1600’s, who invented the “stock market” as we know it today. Previously, empires such as the British and Spanish relied upon internal resources to deploy their armies and navies abroad. The Dutch, in contrast, came up with a way to tap into private investors, if you will. That innovation is one of the reasons that compelled the Dutch to effectively compete with the much larger militaries of the British, Spanish and others. https://en.wikipedia.org/wiki/Euronext_Amsterdamalfaspider wrote: ↑Tue Apr 16, 2019 8:40 am It's because the economy as a whole has consistently expanded throughout modern human history (as long as there have been stock markets). Generally, public companies have captured a portion of that growth. The economy has expanded due to population increase and efficiency increased spurred by technology.
Of course, there were times when this was not the case (Europe after the fall of Rome, for example). Political instability and warfare tend to be the biggest factor in large-scale long-term decline.
Bottom line: the system upon which we rely for our retirements is only about 500 years old, give or take.
Re: Why does the stock market go up in the long term?
Wow so much discussion in this thread for such an easy question.FatFire87a wrote: ↑Tue Apr 16, 2019 8:00 am For the stock market to always go up over the long term, that would seem to suggest that stocks are perpetually outperforming expectations, which doesn’t seem to make sense.
Imagine that instead of a company with earnings, you have a bank account that earns interest. You decide to leave some of all of that interest in the account. Then you will find that each year, the account balance goes up. This is the case even though the account never "outperforms expectations". And it is the case even if interest rates change.
30% US Stocks | 30% Int Stocks | 40% Bonds
Re: Why does the stock market go up in the long term?
"retirement" is only about 70-80 years old. Before that, you worked until you died, or until some invading barbarians burned your village (and you) to the ground.WyomingFIRE wrote: ↑Fri Oct 22, 2021 9:26 pmI am not a historical scholar, but I always understood that it was the Dutch, in the early 1600’s, who invented the “stock market” as we know it today. Previously, empires such as the British and Spanish relied upon internal resources to deploy their armies and navies abroad. The Dutch, in contrast, came up with a way to tap into private investors, if you will. That innovation is one of the reasons that compelled the Dutch to effectively compete with the much larger militaries of the British, Spanish and others. https://en.wikipedia.org/wiki/Euronext_Amsterdamalfaspider wrote: ↑Tue Apr 16, 2019 8:40 am It's because the economy as a whole has consistently expanded throughout modern human history (as long as there have been stock markets). Generally, public companies have captured a portion of that growth. The economy has expanded due to population increase and efficiency increased spurred by technology.
Of course, there were times when this was not the case (Europe after the fall of Rome, for example). Political instability and warfare tend to be the biggest factor in large-scale long-term decline.
Bottom line: the system upon which we rely for our retirements is only about 500 years old, give or take.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: Why does the stock market go up in the long term?
I was advised that "since you will spend most of your life working, pick a career you like and can do even into your 70s or beyond". A bit of "retire late/never", but it rings true that retirement has never been a sure thing.HomerJ wrote: ↑Sat Oct 23, 2021 12:58 am"retirement" is only about 70-80 years old. Before that, you worked until you died, or until some invading barbarians burned your village (and you) to the ground.WyomingFIRE wrote: ↑Fri Oct 22, 2021 9:26 pmI am not a historical scholar, but I always understood that it was the Dutch, in the early 1600’s, who invented the “stock market” as we know it today. Previously, empires such as the British and Spanish relied upon internal resources to deploy their armies and navies abroad. The Dutch, in contrast, came up with a way to tap into private investors, if you will. That innovation is one of the reasons that compelled the Dutch to effectively compete with the much larger militaries of the British, Spanish and others. https://en.wikipedia.org/wiki/Euronext_Amsterdamalfaspider wrote: ↑Tue Apr 16, 2019 8:40 am It's because the economy as a whole has consistently expanded throughout modern human history (as long as there have been stock markets). Generally, public companies have captured a portion of that growth. The economy has expanded due to population increase and efficiency increased spurred by technology.
Of course, there were times when this was not the case (Europe after the fall of Rome, for example). Political instability and warfare tend to be the biggest factor in large-scale long-term decline.
Bottom line: the system upon which we rely for our retirements is only about 500 years old, give or take.
Very likely I could retire early at 45-50, but the job can be a major source of enjoyment. I would likely be bored stiff being retired...
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Why does the stock market go up in the long term?
Sandtrap wrote: ↑Tue Apr 16, 2019 8:52 amA senior multi-gazillionaire mentor put it this way (I was told this in the 60's):Ron wrote: ↑Tue Apr 16, 2019 8:33 am I've always held the long term view that it's due to the increase in population, world-wide.
More people? More goods and services required, regardless of the current state of economy from developing to fully developed countries.
I'm a simple person and therefore think in simple solutions ...
- Ron
The economy will always grow. For example: Gerber Baby Food. The world will always make babies and more babies. Which means more baby food and more baby food. So, you're investing in the long term economy of the population of the world.
Fellow simple person.
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Re: Why does the stock market go up in the long term?
I'm not sure what all has been offered, but I will just mention that if nothing changes except time, the NPV could very well be going up just by the passage of time. During a lot of of the company's history, there will be larger cash flows farther away in time. As time goes by, those expected cash flows get closer. Even if you don't change your opinion of them, they become more present-valuable as they get closer. That's a very common situation.FatFire87a wrote: ↑Tue Apr 16, 2019 8:00 am For the stock market to always go up over the long term, that would seem to suggest that stocks are perpetually outperforming expectations, which doesn’t seem to make sense.
Thanks in advance everyone.
I'm not saying I agree with any of how anybody values stocks. I'm just taking your question at face value.
This time is the same
Re: Why does the stock market go up in the long term?
I think of it this way. There are a finite amount of assets on the planet. As long as population increases, asset demand and thus price will continue to increase.
Re: Why does the stock market go up in the long term?
Is it possible that the growth is not inevitable and we just happen to be in a stage of a process?
Re: Why does the stock market go up in the long term?
Increase in population (more consumers), more products, better technology and services, increased longevity.moshe wrote: ↑Tue Apr 16, 2019 8:38 amAs well as future technologies that allow for ? in the future.Ron wrote: ↑Tue Apr 16, 2019 8:33 am I've always held the long term view that it's due to the increase in population, world-wide.
More people? More goods and services required, regardless of the current state of economy from developing to fully developed countries.
I'm a simple person and therefore think in simple solutions ...
- Ron
"If more of us valued food and cheer and song above hoarded gold, it would be a merrier world." |
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Re: Why does the stock market go up in the long term?
Again, it's not a closed system. A couple billion people input their work into the system every single day, and the system becomes more valuable over time.
When work and resources stop getting input into the system, then it will stop growing.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: Why does the stock market go up in the long term?
I’d theorize that our forward looking expectations are incorrect because a large part of growth is technological innovation. Imagine trying to forecast future earnings from the PC, cellphones, Amazon, etc. in 1950. I’d theorize that, as a practical matter, earnings on the future tail end are valued at 0 because they are too distant to forecast and that as time moves forward, we begin to forecast them and add them into a stock’s value. Because technology improves, those newly included future earnings are replacing less valuable earned earnings.
I’d also suggest that humankind is improving at an unexpectedly exponential pace and there’s a good amount of evidence that we suffer from psychological deficiencies that would cause is to underestimate this growth. Marian Tupy has a good book that discusses negativity and magnitude biases in our perceptions that cause us to overestimate negative news and miss or underestimate good news and that discusses long terms trends and shows how incredibly bright the future looks in terms of lifespan, wealth, peace, the environment, nutrition, natural resources, etc: Ten Trends Every Smart Person Should Know. In light of this, I think it’s reasonable to conclude we systemically underestimate future performance.
I’d also suggest that humankind is improving at an unexpectedly exponential pace and there’s a good amount of evidence that we suffer from psychological deficiencies that would cause is to underestimate this growth. Marian Tupy has a good book that discusses negativity and magnitude biases in our perceptions that cause us to overestimate negative news and miss or underestimate good news and that discusses long terms trends and shows how incredibly bright the future looks in terms of lifespan, wealth, peace, the environment, nutrition, natural resources, etc: Ten Trends Every Smart Person Should Know. In light of this, I think it’s reasonable to conclude we systemically underestimate future performance.
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Re: Why does the stock market go up in the long term?
This is THE answer.HomerJ wrote: ↑Fri Oct 22, 2021 5:17 pmBecause it's not a closed system.FatFire87a wrote: ↑Tue Apr 16, 2019 8:00 am Everyone says: the stock market will always go up in the long term. Why is that the case?
Billions of people go to work each day and input their work into the system, and resources are pulled from the ground and input into the system and so the entire system grows more valuable over time.
See Human Action: A Treatise on Economics (1949) by Ludwig Von Mises. It posits that the economy grows because of what humans DO.
The stock market is a result of the economy so it too grows -- at least in a free-market, capitalistic, society.
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Re: Why does the stock market go up in the long term?
The premise is incorrect. Stock values do not always increase generally over time without bound. In 1987 when the MSCI emerging markets index was created, Argentina had the largest market cap of any EM country. The market went close to zero in the currency crisis of the 1990's and is still nowhere near its peak.
The best performing equity market in the first 16 years of the 20th century (Russian stock market) went to zero in 1917.
Future revenue is discounted back more steeply than at prevailing rates to account for risks that may not materialize, which will lead to overperformance when they don't materialize.
The best performing equity market in the first 16 years of the 20th century (Russian stock market) went to zero in 1917.
Future revenue is discounted back more steeply than at prevailing rates to account for risks that may not materialize, which will lead to overperformance when they don't materialize.
Last edited by Northern Flicker on Mon Oct 25, 2021 12:18 pm, edited 1 time in total.
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Re: Why does the stock market go up in the long term?
According to Jack Bogle, the long run return on stocks must equal dividend yields plus earnings growth.
So as long as earnings grow, I'm confident my stocks will grow too.
So as long as earnings grow, I'm confident my stocks will grow too.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: Why does the stock market go up in the long term?
Sure, but how do we know if earnings keep growing? For example, Apple can only sell a finite amount of iPhones.whereskyle wrote: ↑Sun Oct 24, 2021 6:20 pm According to Jack Bogle, the long run return on stocks must equal dividend yields plus earnings growth.
So as long as earnings grow, I'm confident my stocks will grow too.
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Re: Why does the stock market go up in the long term?
Why do you think that? Even if true, who cares?? IBM isn't selling many typewriters anymore. Why should I care that someday Apple may not sell many iPhones?Marseille07 wrote: ↑Sun Oct 24, 2021 6:22 pmSure, but how do we know if earnings keep growing? For example, Apple can only sell a finite amount of iPhones.whereskyle wrote: ↑Sun Oct 24, 2021 6:20 pm According to Jack Bogle, the long run return on stocks must equal dividend yields plus earnings growth.
So as long as earnings grow, I'm confident my stocks will grow too.
Re: Why does the stock market go up in the long term?
That's one stock, one company. Most stocks don't keep going up forever, it is the market as a whole. Someone is going to be selling computers for sure.Marseille07 wrote: ↑Sun Oct 24, 2021 6:22 pmSure, but how do we know if earnings keep growing? For example, Apple can only sell a finite amount of iPhones.whereskyle wrote: ↑Sun Oct 24, 2021 6:20 pm According to Jack Bogle, the long run return on stocks must equal dividend yields plus earnings growth.
So as long as earnings grow, I'm confident my stocks will grow too.
70% Global Stocks / 30% Bonds