I recently stumbled upon something that seemed utterly nonsensical, shared by a popular influencer who claimed, “What goes up must come down,” particularly referring to stocks. This is complete nonsense and honestly just clickbait. The truth is quite the opposite: what goes down must come up.
For centuries, stocks have returned an average of 8–12 percent per annum, meaning they have historically doubled every six to seven years. That’s the evidence I want to delve into in today’s episode. It’s really quite simple, and to the conspiracy theorists, I’m sorry—it’s not about printing money or speculation. Let’s break it down.
Understanding Stocks and Shares
The first thing you need to know about stocks and shares is that investing is not about charts and squiggly lines. That’s trading, which is just speculation. Stocks, however, are a real investment. When you buy a share, you legally own a part of a real company. These companies create goods and services that people need, and as an investor, you’re entitled to a share of their profits and dividends. The best part? You don’t need specialist knowledge or a degree in economics, and you certainly don’t need to be wealthy.
Share prices grow because profits grow. There are two main drivers for profit growth: the global economy and inflation. Historically, the global economy has always grown, and inflation is a persistent presence.
The Role of Economic Growth and Inflation
Economic growth means increased spending, as people buy more things. If you review global GDP data, despite various crises—wars, pandemics, recessions—the economy has generally doubled from $50 trillion in 2007 to $100 trillion today. This growth in GDP translates to increased company profits, which subsequently elevate share prices. While recessions do occur, they’re opportunities rather than setbacks because, over time, the economic cycle favors growth.
On the other hand, inflation is indispensable to companies. Inflation can boost company profits as prices rise, leading to higher revenues. For example, if a company had revenue of $100,000 with costs of $80,000 last year, it made a profit of $20,000. With a 10% inflation rate, revenues could increase to $110,000 and costs to $88,000, resulting in a profit of $22,000—a 10% growth just via inflation. Many costs remain stable over time, leading to even better profit margins.
Shares and Profit Tracking
Shares don’t just accompany profits; they track them closely. For instance, if a share is priced at £40 with earnings of £4 per share, the price-earnings ratio is 10. If earnings increase to £5 but the share price remains the same, the ratio drops to 8, indicating an undervaluation. To correct this, the share price would naturally rise to £50, aligning with the increased earnings. This is why share prices directly track earnings growth, leading to consistent value increases.
Diversifying Your Investment
Historically, investing in diversified funds or ETFs has never led to a permanent decline in shares. Following the historical evidence rather than sensationalist headlines is key to smart investing. Throughout the ages, shares have grown regardless of external crises, proving themselves as robust, inflation-beating assets.
The takeaway is to always base your investments on evidence. When confronted with catchy but unfounded claims like “What goes up must come down,” always ask for the evidence. If there’s none, it’s likely just clickbait trying to mislead you.
In my Investment Roadmap you’ll find a guide to investing, complete with calculators and insights you might not have encountered before. If you found this episode helpful, I encourage you to subscribe for future insights.
Thank you for reading, and remember—follow the evidence, not the noise…
