Does the stock market create wealth?

KandJBm · January 5, 2016

So K and J have been reading lots of books and articles in the area of financial economics and wealth. Some of the readings are more philosophical than others. A few have been radical and aggressive and a few others have been conservative and defensive. Taken as a whole they have led us to a number of questions such as:

Does our stock portfolio create wealth?

If our very well diversified stock portfolio is valued at $X today can we be confident that it will be worth at least $X (in real, inflation adjusted terms) in the long run (say 10 to 40 years)? (Assume no additions or withdrawals and all dividends are reinvested.)

Your thoughts are appreciated. I hope these questions are at least a bit intriguing to some of you as there are to us.

J

rbertalotto · January 5, 2016

If the government never produced (printed) money.....there would be a finite amount of wealth. To make some, someone would have to lose some. But that isn't how it works. In the last 8 years the government has been printing money and most of it has been flowing into corporations that are feeding the stock market rise. It simply can't go on forever. It MUST crash. It is hugely over rated at the moment. Hang onto your hats because this crash will be a doozy!

But, if you can protect what you have in some way, and buy back in at the bottom, it will come back. It always has and always will. Total manipulation by the banks and investment house. The last 6 years have seen huge gains and the rich got a whole bunch richer.

KandJBm · January 5, 2016

If the government never produced (printed) money.....there would be a finite amount of wealth. To make some, someone would have to lose some. But that isn't how it works. In the last 8 years the government has been printing money and most of it has been flowing into corporations that are feeding the stock market rise. It simply can't go on forever. It MUST crash. It is hugely over rated at the moment. Hang onto your hats because this crash will be a doozy!

But, if you can protect what you have in some way, and buy back in at the bottom, it will come back. It always has and always will. Total manipulation by the banks and investment house. The last 6 years have seen huge gains and the rich got a whole bunch richer.

Thanks for your reply, but may I suggest that your reply would fit better with the thread, "Are you still in?"

BooneDocks · January 5, 2016

As long as the companies you invest in are growing and their results are improving then they will be creating wealth for their stockholders. You will need to make your assessment about whether the underlying economies of the countries where your investments operate will provide the opportunities for this growth.

Barbaraok · January 5, 2016

Nothing, absolutely nothing, is certain in life. That said, why wouldn't you be adding to or withdrawing from your portfolio over the coming years? At the very least, you would have to reinvest dividends, etc. Are these tax deferred funds?

Barb

Jack Mayer · January 5, 2016

I guess this question is kinda like asking "Does working create wealth". Yes, it does for some and not for others. It "totally depends".

mocroc · January 5, 2016

The Market of today is not the market of 10, 20 or more years ago. Today with HTF (High-frequency trading), Dark Pools/Dark Liquidity, Hedge Funds and Private Equity Firms, the average investor does not stand a chance. Plus if you add in the special interest of Elected Officials who except campaign funds from wealth individuals and companies there is not a free market place to invest in. Here are a few links to help understand the roadblocks of making money in today's Market.

https://en.wikipedia.org/wiki/High-frequency_trading

https://en.wikipedia.org/wiki/Dark_liquidity#Dark_pools

https://en.wikipedia.org/wiki/Hedge_fund

https://en.wikipedia.org/wiki/Private_equity_firm

rocmoc n AZ/Mexico

KandJBm · January 6, 2016

Nothing, absolutely nothing, is certain in life. That said, why wouldn't you be adding to or withdrawing from your portfolio over the coming years? At the very least, you would have to reinvest dividends, etc. Are these tax deferred funds?

Barb

Sorry, my goal here was to keep the results of the portfolio "out of the hands of the investor" and thus totally due to the stock market or whatever other forces influence the portfolio's valuation. So I have edited the original again to include reinvesting dividends which I meant to have happened, but did not explain that.

As long as the companies you invest in are growing and their results are improving then they will be creating wealth for their stockholders. You will need to make your assessment about whether the underlying economies of the countries where your investments operate will provide the opportunities for this growth.

I understand that companies create products and services and other things people value. But that is not my question at this time. My question is explicitly and only about the "stock market." Does the stock market create wealth? And if so how?

I guess this question is kinda like asking "Does working create wealth". Yes, it does for some and not for others. It "totally depends".

Yes and no. I agree that working usually creates wealth, but that is not really my question. Does the stock market create wealth? How? And if it does create wealth, what is that wealth?

The Market of today is not the market of 10, 20 or more years ago. Today with HTF (High-frequency trading), Dark Pools/Dark Liquidity, Hedge Funds and Private Equity Firms, the average investor does not stand a chance. Plus if you add in the special interest of Elected Officials who except campaign funds from wealth individuals and companies there is not a free market place to invest in. Here are a few links to help understand the roadblocks of making money in today's Market.

https://en.wikipedia.org/wiki/High-frequency_trading

https://en.wikipedia.org/wiki/Dark_liquidity#Dark_pools

https://en.wikipedia.org/wiki/Hedge_fund

https://en.wikipedia.org/wiki/Private_equity_firm

rocmoc n AZ/Mexico

Very interesting read on the Dark Pools. I had never heard of them, but then I'm a novice.

I think many people reading these "Finances and Investing" threads would disagree with you that "the average investor does not stand a chance." I would be interested, however, in any more analysis you might make about why the average investor does not stand a chance. I don't expect a full blown analysis! Just some more explanation could be helpful.

Thanks to you all!

J

Barbaraok · January 6, 2016

Why would you not want to make adjustments to your portfolio over time? I can remember when no one owned Apple but we have always loved them. So I picked some specific funds that were invested heavily in Apple. We have a very comfortable retirement because of that. But we also dumped funds that stayed to long in sectors or with companies that we decided didn't met our investing objectives at the time. One was heavily invested in the 90s in stocks like Kodak. You have to evaluate the funds/stocks, where they are going and if that matches your objectives. And the management of funds/companies changes over time and if you aren't evaluating those changes to see if they line up with where you want to be, then at the end of a set time you may be disappointed with the result.

The stock market is simply a place for people to buy and sell stock. It creates wealth for those who invested in the company that runs the market and it provides a platform for others to create wealth. Without a place where buying and selling could take place, we would be back to investing in the neighborhood company - period. That might provide for a good living later on, but certainly not create wealth that we see today.

Now a question for you - - why the specific question about the stock market creating wealth? Is there a hidden question or statement you want to make? It is important to remember that every person has a different definition of what is 'wealth'. I believe that there are a number of people on this, and other forums, who have found that by investing prudently, they are able to enjoy a comfortable retirement. Does that make them wealthy? In terms of what some hedge fund manager might consider wealthy, no; but are they able to enjoy their remaining years, take care of their family, plan accordingly, enjoy life with family and friends- that is what I call wealthy.

Barb

2gypsies · January 6, 2016

I wouldn't call it 'wealth' but over the years with ups and downs, we feel very comfortable. However, I think we feel that way because we full-timed for so long and found out that we really don't need a lot. We've always been savers, paid cash for things, and in 50 years didn't buy unneeded items...and still don't.

theeyres · January 6, 2016

Sounds to me like you are asking if the stock market creates wealth for you with your portfolio no matter what it is, with you never making any changes. My answer would be only if you are extremely lucky. Many big companies have gone bankrupt or at least in the toilet. If they are in your portfolio you many never make it up. Other stock never goes anywhere... Well diversified means nothing...according to who?

Jack Mayer · January 6, 2016

Advocating that an individual investor cannot make money in the stock market is an interesting position to take. Since so many people have. And continue to do so. But mostly these are longer term positions in companies that create value for the investor. Day trading positions is very difficult, but some people do it successfully. VERY few, though, and you can make a case that it is pretty much not possible for the average non-professional investor to do well in day trading.

Investing is like anything else. It takes work or knowledge (or both) to be successful. But you can certainly make money in the market. Personally, over the long course I've managed my own funds, and I've also let professional managers do it for me. I did OK on my own, but the professional managers do far better. And, yes, I understand about fees, and such. They STILL do better. But you have to watch them like hawks watch a rat. And, IMO only, you should diversify your investments outside the market.

TheDuke · January 6, 2016

Without having a clue as to what you are starting a conversation about, or what value it has for me, my answer is yes. How so do you say? Well I have more money now than when I retired in 2000. Does that mean I am ahead of inflation, I have no idea and I don't really care as there is nothing I can do about inflation except to invest in things I know nothing about or care to learn about at this stage in my life.

As far as the individual investor not having a chance, is a weird comment to me. There are more than a few ways to make/grow money in the market. For myself, it is index funds. For others it might be might be guessing right about specific stocks like Apple, Tesla, Facebook, etc.

So to answer your question, yes it does for a fair amount of people, but not for everyone obviously.

whj469 · January 6, 2016

If I buy a stock for say $50 and it goes up to $100 and I sell it, it has made wealth for me. What

is the question about? I don't thjink that I realy understand the question?

Ray,IN · January 7, 2016

referring to your last sentence;

In the long-term investments in the stock market create wealth-for the investors. That is proven by stock market charts and graphs recorded after the big crash in 1929; provided you hold your investments long enough.

Is that the crux of your questions?

KandJBm · January 7, 2016

What am I asking? (Sorry, under edit. Will finish tomorrow.)

skp093018 · January 7, 2016

"But you have to watch them like hawks watch a rat".....the rat being the investor, the ~~investment industry~~ hawk....sees the rat as an easy meal....

Regards

Gemstone

Jack Mayer · January 7, 2016

"But you have to watch them like hawks watch a rat".....the rat being the investor, the ~~investment industry~~ hawk....sees the rat as an easy meal....

Regards

Gemstone

An interesting take on it.....if someone feels they cannot deal with scrutinizing financial advisers then for SURE they should not be using them.

KandJBm · January 7, 2016

My reply above was getting way too long. So here is a shortened version without all our worries and cofusions.

What am I asking? I am trying to figure out how wealth is increased or decreased in the stock market, how wealth is increased or decreased in our portfolio of stocks. I realize that the publicly traded companies increase and decrease in value as they produce and sell more or less goods and services. But that is not exactly what I am asking and I am not asking how much wealth has been generated when I buy a stock for $ X and sell it for a gain of $ (x+1).

Why I am asking this question is because I want a better understanding of how confident we can be about the current and future valuation of our stock portfolio. I'm not looking for theories of cyclical and secular market cycles, or short run vs. long run market timing or quarterly balancing or some such. As much as it is possible I want to know the factors, reasons, variables, public policies, historical determinants...you name it or whatever you call "it" that creates or destroys the wealth we "see" in the stock market.

For example, I "see" the data on the DOW index at http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

(be sure to also look at it with nominal and linear graph settings) showing the growth rate (nominal) for the DOW from 1914 to 1980 is about 4.5% (0.62% real). While its growth rate from 1980 to 2015 peak is about 8.9% (6% real). Now that is a very peculiar looking graph. In different fields of study that shape might indicate a "phase change" or the introduction of a new species into an ecosystem or just the opposite, the elimination of a species or the introduction of a cancer or .... But what does it mean here?

What caused the wealth increase differences in those two time frames? Some think the 4.5% rate is likely an accurate statistic since it gibes with long run real GDP rates (2 to 4%). And these folks contend that the 8.6% rate starting around 1980 approximately coincides with Federal Reserve policies of lowering interest rates to boost economic performance, i.e. GDP - but it didn't much boost GDP (at least not US GDP). Instead, most of the increase in credit (and of course debt), due to low interest rates, has flowed into financial markets (especially stocks and bonds domestic and emerging around the world) where it boosts assets valuations but produces no new wealth (, i.e. goods and services.) Can that be good? Permanent? Something to count on from the Federal Reserve?

So we are concerned.

J

TheDuke · January 7, 2016

I think you need to sit down and take a few breaths. Next delete every favorite financial site from your browser. Next toss every financial book you own.

You sound exqctly like a person who has converted to a new religion, or a new diet, etc and now goes around extoling the virtuous of that.

There are only two things that are true about historical data re the market.

1. Historical data cannot predict the future. It can only show you cause and effect at that time whatever that time was.

2. No one can predict the future market even as soon as tomorrow.

Lets play pretend. Itis now 1995 and you are 70 years old and asking the same questions as you are asking now. What is that historical data showing you about 2015 and the market and the value of your investments. I would even let you pick investments that are high flyers today.

If you are as concerned about the market as you write, you should look into other ways to grow your money. Maybe buy art, or real estate, antique items, etc.

mocroc · January 7, 2016

I think you need to sit down and take a few breaths. Next delete every favorite financial site from your browser. Next toss every financial book you own.

You sound exqctly like a person who has converted to a new religion, or a new diet, etc and now goes around extoling the virtuous of that.

There are only two things that are true about historical data re the market.

1. Historical data cannot predict the future. It can only show you cause and effect at that time whatever that time was.

2. No one can predict the future market even as soon as tomorrow.

Lets play pretend. Itis now 1995 and you are 70 years old and asking the same questions as you are asking now. What is that historical data showing you about 2015 and the market and the value of your investments. I would even let you pick investments that are high flyers today.

If you are as concerned about the market as you write, you should look into other ways to grow your money. Maybe buy art, or real estate, antique items, etc.

Very well written! I would add

3. Payoff all personal debt. There is not a safer return on your investment while lower needed income. When you lower needed income you also lower your income tax profile. Asset Wealth is better than Income Wealth.

rocmoc n AZ

mocroc · January 7, 2016

Will also add this video with a view of today's market,

https://www.youtube.com/watch?v=Ix1RVpYyx-s

rocmoc n AZ

KandJBm · January 8, 2016

I think you need to sit down and take a few breaths. Next delete every favorite financial site from your browser. Next toss every financial book you own.

You sound exqctly like a person who has converted to a new religion, or a new diet, etc and now goes around extoling the virtuous of that.

There are only two things that are true about historical data re the market.

1. Historical data cannot predict the future. It can only show you cause and effect at that time whatever that time was.

2. No one can predict the future market even as soon as tomorrow.

Lets play pretend. Itis now 1995 and you are 70 years old and asking the same questions as you are asking now. What is that historical data showing you about 2015 and the market and the value of your investments. I would even let you pick investments that are high flyers today.

If you are as concerned about the market as you write, you should look into other ways to grow your money. Maybe buy art, or real estate, antique items, etc.

Thank you, but my question is not about predicting the future. It is about wealth creation and the stock market. Do you have anything to say about my question?

J

Barbaraok · January 8, 2016

J, what we are all trying to figure out is what it is about the 'stock market' that has you so fixated. Do you see today's reaction on the major exchanges as a reason to stay away or as a buying opportunity. If the first, put your money elsewhere, if the latter, then equity investments might be something you should look at. With Apple below $100/share, If I had a few extra dollars around, I'd be buying. Or any other favorite company that you have - if they have dropped 2-5%, and the business is sound, then this could be a good buying opportunity.