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Why Stocks?

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February 11, 2007 – Comments (3)

Some of you may be wondering why I am so interested in stocks. What do stocks offer that other investments don’t? Well, to start, I think investing in a business is more exciting than buying debt (bonds), real estate, even gold. But excitement isn’t what we’re looking for, we’re looking for the investments that will gain us the most money in the quickest amount of time. Stocks have by far been the best long-term investments that are legal and available to the public.

To prove this point, author/investor Dr. Jeremy Siegel, in his book "Stocks for the Long-Run", did some research into the long-term performance of stocks compared to three other investment options. How he did this was by researching how one dollar invested into stocks, bonds, Treasury bills, and gold would have performed from 1802 to 1991. This is a period of 189 years, so it’s probably the best comparison of investments over the long-term as you’re going to get.

So, one dollar invested in stocks in 1802 (adjusted for inflation) would be worth $109,000 in 1991. One dollar invested in bonds would be worth $605 in 1991. And one dollar invested in gold would be worth $1.24. That’s right, gold, the deliverer of freedom, what so many men have fought over for centuries, has been one of the worst long-term investments. But let’s do one more example: housing. In his book "Irrational Exuberance", Robert Shiller finds that the average price of a house rose only 66% from 1890 to 2004 (that’s 114 years!). Even with the belief that housing is the hot market to be in, it’s been another lousy long-term investment. Through depressions in the economy and several stock market crashes, stocks have still managed to bring in the greatest returns to investors by a wide margin.

Between 1961 and 1999, the S&P 500 stock index (one of the most commonly used benchmarks for the overall stock market – it’s an index of 500 stocks) has returned average gains of 12.54%. Over the same period, the Dow Jones Industrial Average (DJIA – the 30 largest and most widely held stocks in the U.S.) has returned 12.39%. You get the point. If you a have a timeframe of even five years, look into stocks. Have fun, learn, and be patient. That should be the motto of every investor.

How come stocks have been such a great investment over the long-term, while housing, gold, and other such investments have downright stunk? Businesses keep growing. Businesses keep expanding. New businesses come in. With gold, it's just gold. Gold today is what gold was during the gold rush. The best businesses out there change and adapt to new times. Businesses that don't adapt won't be around for very long (horse-and-buggy businesses probably fell out a while ago). Sure, the stock market will have run-ups and crashes, but that's caused from public thinking and what investors do with their money. A business is a business. It has value, and no matter what the stock price does, it will still hold that value. I think this is a key reason for why stocks have had such a degree of outperformance in the long run. Businesses grow, businesses expand. Some will falter, no doubt, but overall a lot of value is created over time -- thus the stock market outperformance.

3 Comments – Post Your Own

#1) On February 19, 2007 at 3:04 PM, IsThisThingOn (< 20) wrote:

Good post. A quick once over of this site shows the true growth potential of stocks. That's why I'm here now!!

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#2) On February 22, 2007 at 2:02 AM, hlacheen (99.16) wrote:

You wrote an article on this subject in Today's Teen, right?

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#3) On February 26, 2007 at 6:50 PM, camistocks (< 20) wrote:

hi,

Jeremy Siegel has sold a lot of books, that's for sure. I did'nt read it, but I know the main point, stocks are better than any other investments in the long run.

However does he tell the reader, how stocks did from the start of 1969 to the end of 1974? There were two brutal bear markets in between. Or from August 1929 - 1933? I guess you know, what was then. Companies, which were thought to be the best long term investments went bankrupt. So many people lost everything by believing in buy and hold for the long term, come whatever. There are really only very few companies that are still around since the 30's or even since the 70's.

There are times were you own stocks, and there are times when you own hard assets. It's very easy to prove something based on an index like Siegel did. But real life companies perform differently, than theories of professors. Well if anything, it tells us to invest in an index fund, rather than a company.

BTW, I even completely forgot to mention the recent brutal bear from 2000 - 2003. And so did obviously most Buy and Holders. ;-)

PS I find it great that you are so interested in stocks at your age. You write like a grown up.

Peter

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